Why Investors Shouldn't Be Surprised By Gen Digital Inc.'s (NASDAQ:GEN) Low P/E

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Gen Digital Inc. (NASDAQ:GEN) as an attractive investment with its 10.1x 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 pleasing for Gen Digital as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Gen Digital

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

Is There Any Growth For Gen Digital?

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

Retrospectively, the last year delivered an exceptional 136% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 104% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 1.0% per annum over the next three years. That's not great when the rest of the market is expected to grow by 10% per annum.

With this information, we are not surprised that Gen Digital 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 Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Gen Digital's 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Gen Digital (including 1 which is a bit concerning).

Of course, you might also be able to find a better stock than Gen Digital. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.