When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider Xerox Holdings Corporation (NASDAQ:XRX) as an attractive investment with its 14.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Xerox Holdings hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.free report is a great place to start.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Xerox Holdings would need to produce sluggish growth that's trailing the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 14%. Still, the latest three year period has seen an excellent 2,772% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 18% during the coming year according to the six analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 11%, which is noticeably less attractive.
In light of this, it's peculiar that Xerox Holdings' P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Final Word
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 Xerox Holdings' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Xerox Holdings with six simple checks will allow you to discover any risks that could be an issue.
You might be able to find a better investment than Xerox Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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.