Earnings Working Against Standard Mercantile Acquisition Corp.'s (TSE:SMA) Share Price
With a price-to-earnings (or "P/E") ratio of 2.6x Standard Mercantile Acquisition Corp. (TSE:SMA) may be sending very bullish signals at the moment, given that almost half of all companies in Canada have P/E ratios greater than 12x 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.
As an illustration, earnings have deteriorated at Standard Mercantile Acquisition over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
View our latest analysis for Standard Mercantile Acquisition
Although there are no analyst estimates available for Standard Mercantile Acquisition, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Does Growth Match The Low P/E?
Standard Mercantile Acquisition'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.
Retrospectively, the last year delivered a frustrating 1.9% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 12% shows it's noticeably less attractive on an annualised basis.
In light of this, it's understandable that Standard Mercantile Acquisition'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.
What We Can Learn From Standard Mercantile Acquisition'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 Standard Mercantile Acquisition revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
Before you take the next step, you should know about the 4 warning signs for Standard Mercantile Acquisition (3 are significant!) 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 low P/E).
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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.
