Investors Aren't Buying Gates Industrial Corporation plc's (NYSE:GTES) Earnings
When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Gates Industrial Corporation plc (NYSE:GTES) as an attractive investment with its 12.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Gates Industrial certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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.
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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 Gates Industrial's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 33%. The strong recent performance means it was also able to grow EPS by 276% 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.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 2.6% over the next year. That's not great when the rest of the market is expected to grow by 10%.
In light of this, it's understandable that Gates Industrial's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Bottom Line On Gates Industrial'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 Gates Industrial maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Gates Industrial that you need to be mindful of.
If these risks are making you reconsider your opinion on Gates Industrial, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.
