Market Still Lacking Some Conviction On Workforce Holdings Limited (JSE:WKF)

Workforce Holdings Limited's (JSE:WKF) price-to-earnings (or "P/E") ratio of 4.7x 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 10x and even P/E's above 14x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Workforce Holdings over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Workforce Holdings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Workforce Holdings will help you shine a light on its historical performance.

How Is Workforce Holdings' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Workforce Holdings' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 119% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

This is in contrast to the rest of the market, which is expected to grow by 11% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Workforce Holdings' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Workforce Holdings' P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Workforce Holdings currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Workforce Holdings (at least 1 which is significant), and understanding these should be part of your investment process.

If you're unsure about the strength of Workforce Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.