Earnings Working Against Signet Jewelers Limited's (NYSE:SIG) Share Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider Signet Jewelers Limited (NYSE:SIG) as a highly attractive investment with its 9x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Signet Jewelers has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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 Signet Jewelers

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Signet Jewelers.

Does Growth Match The Low P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.2% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 4.1% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 11% as estimated by the seven analysts watching the company. That's not great when the rest of the market is expected to grow by 15%.

With this information, we are not surprised that Signet Jewelers is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Signet Jewelers' P/E

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.

As we suspected, our examination of Signet Jewelers' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Signet Jewelers that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.