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When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 23x, you may consider Ashmore Group PLC (LON:ASHM) as an attractive investment with its 16.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Ashmore Group has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Keen to find out how analysts think Ashmore Group's future stacks up against the industry? In that case, our free report is a great place to start.
Is There Any Growth For Ashmore Group?
There's an inherent assumption that a company should underperform the market for P/E ratios like Ashmore Group's to be considered reasonable.
Retrospectively, the last year delivered a decent 2.8% gain to the company's bottom line. EPS has also lifted 9.1% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 2.0% each year over the next three years. With the market predicted to deliver 21% growth per annum, the company is positioned for a weaker earnings result.
With this information, we can see why Ashmore Group is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
What We Can Learn From Ashmore Group's P/E?
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Ashmore Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Ashmore Group with six simple checks.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's 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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