Benign Growth For Ashley Services Group Limited (ASX:ASH) Underpins Its Share Price
Ashley Services Group Limited's (ASX:ASH) price-to-earnings (or "P/E") ratio of 8.4x might make it look like a buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 17x and even P/E's above 32x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Ashley Services Group has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.
See our latest analysis for Ashley Services Group
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Ashley Services Group's earnings, revenue and cash flow.
How Is Ashley Services Group's Growth Trending?
In order to justify its P/E ratio, Ashley Services Group would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 10% last year. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 3.6% shows it's noticeably less attractive on an annualised basis.
In light of this, it's understandable that Ashley Services Group's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Final Word
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Ashley Services Group revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Before you take the next step, you should know about the 3 warning signs for Ashley Services Group that we have uncovered.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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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