Shoe Carnival, Inc.'s (NASDAQ:SCVL) Low P/E No Reason For Excitement

With a price-to-earnings (or "P/E") ratio of 8.5x Shoe Carnival, Inc. (NASDAQ:SCVL) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 34x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

While the market has experienced earnings growth lately, Shoe Carnival's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Shoe Carnival

Keen to find out how analysts think Shoe Carnival's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Shoe Carnival?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shoe Carnival's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 5.4% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 45% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 7.9% as estimated by the two analysts watching the company. That's shaping up to be materially lower than the 15% growth forecast for the broader market.

With this information, we can see why Shoe Carnival is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Shoe Carnival maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Shoe Carnival with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Shoe Carnival, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.