With a median price-to-earnings (or "P/E") ratio of close to 9x in South Africa, you could be forgiven for feeling indifferent about Spanjaard Limited's (JSE:SPA) P/E ratio of 7.7x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
As an illustration, earnings have deteriorated at Spanjaard over the last year, which is not ideal at all. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.
Does Spanjaard Have A Relatively High Or Low P/E For Its Industry?
We'd like to see if P/E's within Spanjaard's industry might provide some colour around the company's fairly average P/E ratio. You'll notice in the figure below that P/E ratios in the Chemicals industry are also similar to the market. So we'd say there is merit in the premise that the company's ratio being shaped by its industry at this time. In the context of the Chemicals industry's current setting, most of its constituents' P/E's would be expected to be held back. Ultimately though, it's going to be the fundamentals of the business like earnings and growth that count most.Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Spanjaard will help you shine a light on its historical performance.
What Are Growth Metrics Telling Us About The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Spanjaard's to be considered reasonable.
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 15%. Even so, admirably EPS has lifted 415% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 7.1% shows it's noticeably more attractive on an annualised basis.
In light of this, it's curious that Spanjaard's P/E sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.
What We Can Learn From Spanjaard's 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.
Our examination of Spanjaard revealed its three-year earnings trends aren't contributing to its P/E 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 pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
There are also other vital risk factors to consider and we've discovered 2 warning signs for Spanjaard (1 is a bit concerning!) that you should be aware of before investing here.
You might be able to find a better investment than Spanjaard. 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).
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This article by Simply Wall St is general in nature. 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.
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