United-Guardian, Inc.'s (NASDAQ:UG) price-to-earnings (or "P/E") ratio of 15.9x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 36x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
The recent earnings growth at United-Guardian would have to be considered satisfactory if not spectacular. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Does Growth Match The Low P/E?
United-Guardian's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 5.7% last year. Pleasingly, EPS has also lifted 31% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Comparing that to the market, which is only predicted to deliver 5.3% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
With this information, we find it odd that United-Guardian is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that United-Guardian currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.
Before you settle on your opinion, we've discovered 2 warning signs for United-Guardian that you should be aware of.
If you're unsure about the strength of United-Guardian's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
If you decide to trade United-Guardian, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.