X5 Retail Group N.V. (LON:FIVE) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. But the last month did very little to improve the 75% share price decline over the last year.
Even after such a large jump in price, X5 Retail Group may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 2.3x, since almost half of all companies in the United Kingdom have P/E ratios greater than 14x and even P/E's higher than 25x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
X5 Retail Group certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.
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 X5 Retail Group's earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The Low P/E?
X5 Retail Group's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 36% last year. Pleasingly, EPS has also lifted 92% 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.
This is in contrast to the rest of the market, which is expected to grow by 6.0% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's peculiar that X5 Retail Group's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
What We Can Learn From X5 Retail Group's P/E?
Even after such a strong price move, X5 Retail Group's P/E still trails the rest of the market significantly. 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.
Our examination of X5 Retail Group revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
Before you settle on your opinion, we've discovered 2 warning signs for X5 Retail Group that you should be aware of.
If you're unsure about the strength of X5 Retail Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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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