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Invicta Holdings Limited (JSE:IVT) Might Not Be As Mispriced As It Looks
Invicta Holdings Limited's (JSE:IVT) price-to-earnings (or "P/E") ratio of 6.5x might make it look like a buy right now compared to the market in South Africa, where around half of the companies have P/E ratios above 9x and even P/E's above 13x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Invicta Holdings certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you 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.
See our latest analysis for Invicta HoldingsAlthough there are no analyst estimates available for Invicta Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Invicta Holdings would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered an exceptional 92% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 251% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 12% shows it's noticeably more attractive on an annualised basis.
With this information, we find it odd that Invicta Holdings is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Key Takeaway
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.
Our examination of Invicta Holdings revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Invicta Holdings that you should be aware of.
You might be able to find a better investment than Invicta 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).
Valuation is complex, but we're helping make it simple.
Find out whether Invicta Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Invicta Holdings Limited, an investment holding company, distributes engineering components and consumables, and provides technical services and solutions in South Africa, Asia, rest of Africa, Europe, and North America.
Excellent balance sheet with proven track record.