There wouldn't be many who think Smith-Midland Corporation's (NASDAQ:SMID) price-to-earnings (or "P/E") ratio of 18.6x is worth a mention when the median P/E in the United States is similar at about 19x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Smith-Midland certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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 Smith-Midland
How Is Smith-Midland's Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like Smith-Midland's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 161% last year. The latest three year period has also seen an excellent 163% overall rise in EPS, aided by its short-term performance. 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 15% 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 interesting that Smith-Midland is trading at a fairly similar P/E to the market. It may be that most investors are not convinced the company can maintain its recent growth rates.
The Key Takeaway
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Smith-Midland revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Smith-Midland that you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.