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When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 16x, you may consider Helloworld Travel Limited (ASX:HLO) as a highly attractive investment with its 6.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Helloworld Travel certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Where Does Helloworld Travel's P/E Sit Within Its Industry?
It's plausible that Helloworld Travel's particularly low P/E ratio could be a result of tendencies within its own industry. You'll notice in the figure below that P/E ratios in the Hospitality industry are higher than the market. So we'd say there is practically no merit in the premise that the company's ratio being shaped by its industry at this time. In the context of the Hospitality industry's current setting, most of its constituents' P/E's would be expected to be raised up. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Helloworld Travel.
Is There Any Growth For Helloworld Travel?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Helloworld Travel's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 111% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 17% per year during the coming three years according to the five analysts following the company. With the market predicted to deliver 12% growth per year, that's a disappointing outcome.
In light of this, it's understandable that Helloworld Travel's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Bottom Line On Helloworld Travel's P/E
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.
As we suspected, our examination of Helloworld Travel's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Helloworld Travel that you should be aware of.
You might be able to find a better investment than Helloworld Travel. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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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