Many Still Looking Away From PennyMac Financial Services, Inc. (NYSE:PFSI)

It's not a stretch to say that PennyMac Financial Services, Inc.'s (NYSE:PFSI) price-to-earnings (or "P/E") ratio of 17.4x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 19x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

PennyMac Financial Services certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for PennyMac Financial Services

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How Is PennyMac Financial Services' Growth Trending?

The only time you'd be comfortable seeing a P/E like PennyMac Financial Services' is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 111%. Still, incredibly EPS has fallen 61% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 43% per annum over the next three years. That's shaping up to be materially higher than the 11% per annum growth forecast for the broader market.

With this information, we find it interesting that PennyMac Financial Services 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 PennyMac Financial Services' 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 PennyMac Financial Services' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you settle on your opinion, we've discovered 2 warning signs for PennyMac Financial Services (1 is potentially serious!) that you should be aware of.

If you're unsure about the strength of PennyMac Financial Services' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.