Why Investors Shouldn't Be Surprised By Eildon Capital Fund's (ASX:EDC) Low P/E
When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 20x, you may consider Eildon Capital Fund (ASX:EDC) as a highly attractive investment with its 8.5x 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.
Earnings have risen firmly for Eildon Capital Fund recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.
Check out our latest analysis for Eildon Capital Fund
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 Eildon Capital Fund's earnings, revenue and cash flow.
Is There Any Growth For Eildon Capital Fund?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Eildon Capital Fund's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 9.7%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 34% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Comparing that to the market, which is predicted to deliver 20% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.
In light of this, it's understandable that Eildon Capital Fund's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. 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 Eildon Capital Fund's P/E
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 Eildon Capital Fund revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.
It is also worth noting that we have found 2 warning signs for Eildon Capital Fund that you need to take into consideration.
If these risks are making you reconsider your opinion on Eildon Capital Fund, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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