When close to half the companies in Australia have price-to-earnings ratios (or “P/E’s”) above 18x, you may consider Peter Warren Automotive Holdings Limited (ASX:PWR) as a highly attractive investment with its 6.3x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it’s justified.
Recent times have been advantageous for Peter Warren Automotive Holdings as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.
Check out our latest analysis for Peter Warren Automotive Holdings
If you’d like to see what analysts are forecasting going forward, you should check out our free report on Peter Warren Automotive Holdings.
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Peter Warren Automotive Holdings would need to produce anemic growth that’s substantially trailing the market.
If we review the last year of earnings growth, the company posted a terrific increase of 210%. The strong recent performance means it was also able to grow EPS by 965% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to slump, contracting by 22% per annum during the coming three years according to the five analysts following the company. With the market predicted to deliver 14% growth per year, that’s a disappointing outcome.
With this information, we are not surprised that Peter Warren Automotive Holdings is trading at a P/E lower than the market. Nonetheless, there’s no guarantee the P/E has reached a floor yet with earnings going in reverse. There’s potential for the P/E to fall to even lower levels if the company doesn’t improve its profitability.
The Bottom Line On Peter Warren Automotive Holdings’ P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.
As we suspected, our examination of Peter Warren Automotive Holdings’ analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won’t provide any pleasant surprises. It’s hard to see the share price rising strongly in the near future under these circumstances.
You need to take note of risks, for example – Peter Warren Automotive Holdings has 2 warning signs (and 1 which is significant) we think you should know about.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.
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.
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