It's not a stretch to say that XP Inc.'s (NASDAQ:XP) price-to-earnings (or "P/E") ratio of 18.5x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 17x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
There hasn't been much to differentiate XP's and the market's retreating earnings lately. It seems that few are expecting the company's earnings performance to deviate much from most other companies, which has held the P/E back. You'd much rather the company wasn't bleeding earnings if you still believe in the business. At the very least, you'd be hoping that earnings don't accelerate downwards if your plan is to pick up some stock while it's not in favour.
Check out our latest analysis for XP
Does Growth Match The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like XP's to be considered reasonable.
Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Still, the latest three year period has seen an excellent 94% overall rise in EPS, in spite of its uninspiring short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 26% during the coming year according to the nine analysts following the company. That's shaping up to be materially higher than the 9.9% growth forecast for the broader market.
With this information, we find it interesting that XP is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.
What We Can Learn From XP's P/E?
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of XP's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
Having said that, be aware XP is showing 1 warning sign in our investment analysis, you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About NasdaqGS:XP
Good value with proven track record and pays a dividend.
