Super Group Limited's (JSE:SPG) Prospects Need A Boost To Lift Shares

With a price-to-earnings (or "P/E") ratio of 5.9x Super Group Limited (JSE:SPG) may be sending bullish signals at the moment, given that almost half of all companies in South Africa have P/E ratios greater than 10x and even P/E's higher than 15x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Super Group's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for Super Group

Want the full picture on analyst estimates for the company? Then our free report on Super Group will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

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

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. That's essentially a continuation of what we've seen over the last three years, as its EPS growth has been virtually non-existent for that entire period. So it seems apparent to us that the company has struggled to grow earnings meaningfully over that time.

Turning to the outlook, the next three years should generate growth of 8.9% each year as estimated by the five analysts watching the company. With the market predicted to deliver 12% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Super Group is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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.

As we suspected, our examination of Super Group's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Super Group has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Super Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.