Enova International, Inc.'s (NYSE:ENVA) price-to-earnings (or "P/E") ratio of 5.3x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E's above 38x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Enova International certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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.
Keen to find out how analysts think Enova International's future stacks up against the industry? In that case, our free report is a great place to start.
Is There Any Growth For Enova International?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Enova International's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 34%. Pleasingly, EPS has also lifted 172% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next three years should generate growth of 18% per annum as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 13% per annum growth forecast for the broader market.
With this information, we find it odd that Enova International is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Key Takeaway
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Enova International currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
Plus, you should also learn about these 2 warning signs we've spotted with Enova International.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email firstname.lastname@example.org.