When almost half of UK companies have price-to-earnings (or “P / E”) ratios above 24x, you might want to consider Studio Retail Group plc (LON: STU) as a very attractive investment with its P / E ratio of 6.9x. However, it is not wise to just take the P / E at face value as there may be an explanation why it is so limited.
The recent times have been beneficial for Studio Retail Group as its profits have grown faster than most other companies. Many may expect the strong earnings performance to deteriorate significantly, which dampened the P / E. If you like the business, you hope it doesn’t so that you can potentially get some stock back while it’s out of fashion.
Want a full picture of analyst estimates for the business? Then our free report on Studio Retail Group will help you find out what’s on the horizon.
Does growth correspond to low P / E?
In order to justify its P / E ratio, Studio Retail Group would need to produce anemic growth that is significantly behind the market.
In retrospect, last year generated an exceptional profit of 366% on the company’s bottom line. Fortunately, BPA is also up 69% overall from three years ago, thanks to the last 12 months of growth. Therefore, it is fair to say that profit growth has recently been superb for the company.
Looking to the future, estimates from the two analysts covering the company suggest profits are expected to rise 16% annually over the next three years. This promises to be significantly lower than the growth forecast of 18% per year for the market at large.
In light of this, it’s understandable that Studio Retail Group’s P / E is below the majority of other companies. It appears that most investors expect limited future growth and are only willing to pay a reduced amount for the stock.
The key to take away
As a general rule, we do not recommend overinterpreting price / earnings ratios when making investment decisions, although this can reveal a lot about what other market participants think about the company.
We have established that Studio Retail Group maintains its low P / E on its expected low growth being below that of the broader market as expected. At this point, investors believe that the potential for improving earnings is not large enough to justify a higher price-to-earnings ratio. It is difficult to see the share price rise sharply in the near future under these circumstances.
In addition, you should also inquire about it 1 warning sign that we spotted with Studio Retail Group.
Of course, you may also be able to find a better stock than Studio Retail Group. So you might want to see this free set of other companies whose P / E is less than 20x and whose profits have risen sharply.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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