There wouldn't be many who think ICZOOM Group Inc.'s (NASDAQ:IZM) price-to-earnings (or "P/E") ratio of 13.3x is worth a mention when the median P/E in the United States is similar at about 14x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
For instance, ICZOOM Group's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
Although there are no analyst estimates available for ICZOOM Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The P/E?
The only time you'd be comfortable seeing a P/E like ICZOOM Group's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a frustrating 2.5% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 3,639% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Comparing that to the market, which is only predicted to deliver 5.5% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
With this information, we find it interesting that ICZOOM Group is trading at a fairly similar P/E to the market. It may be that most investors are not convinced the company can maintain its recent growth rates.
The Key Takeaway
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.
We've established that ICZOOM Group currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.
You need to take note of risks, for example - ICZOOM Group has 3 warning signs (and 2 which are significant) we think you should know about.
Of course, you might also be able to find a better stock than ICZOOM Group. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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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.
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