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When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 14x, you may consider Fab-Form Industries Ltd. (CVE:FBF) as an attractive investment with its 10.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
The earnings growth achieved at Fab-Form Industries over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, 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.
How Does Fab-Form Industries' P/E Ratio Compare To Its Industry Peers?
An inspection of average P/E's throughout Fab-Form Industries' industry may help to explain its low P/E ratio. The image below shows that the Basic Materials industry as a whole has a P/E ratio higher than the market. So it appears the company's ratio isn't currently influenced by these industry numbers whatsoever. Some industry P/E's don't move around a lot and right now most companies within the Basic Materials industry should be getting a boost. Ultimately though, it's going to be the fundamentals of the business like earnings and growth that count most.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Fab-Form Industries will help you shine a light on its historical performance.
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Fab-Form Industries' is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 66% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Comparing that to the market, which is predicted to shrink 8.3% in the next 12 months, the company's positive momentum based on recent medium-term earnings results is a bright spot for the moment.
In light of this, it's quite peculiar that Fab-Form Industries' 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.
The Bottom Line On Fab-Form Industries' P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of Fab-Form Industries revealed its growing earnings over the medium-term aren't contributing to its P/E anywhere near as much as we would have predicted, given the market is set to shrink. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. At least the risk of a price drop looks to be subdued, but investors think future earnings could see a lot of volatility.
There are also other vital risk factors to consider and we've discovered 4 warning signs for Fab-Form Industries (2 are significant!) that you should be aware of before investing here.
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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