The Market Doesn't Like What It Sees From Arhaus, Inc.'s (NASDAQ:ARHS) Earnings Yet As Shares Tumble 33%

Arhaus, Inc. (NASDAQ:ARHS) shares have had a horrible month, losing 33% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 47%, which is great even in a bull market.

Following the heavy fall in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 15x, you may consider Arhaus as an attractive investment with its 9.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Arhaus as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Arhaus

Want the full picture on analyst estimates for the company? Then our free report on Arhaus will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Arhaus' is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 444% last year. The latest three year period has also seen an excellent 2,079% 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.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 12% per year as estimated by the seven analysts watching the company. Meanwhile, the broader market is forecast to expand by 9.6% per year, which paints a poor picture.

In light of this, it's understandable that Arhaus' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Arhaus' recently weak share price has pulled its P/E below most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Arhaus maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Arhaus that you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.