With a price-to-earnings (or "P/E") ratio of 4.7x TPC Consolidated Limited (ASX:TPC) may be sending very bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 20x and even P/E's higher than 38x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
With earnings growth that's exceedingly strong of late, TPC Consolidated has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on TPC Consolidated's earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as TPC Consolidated's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 51% last year. Pleasingly, EPS has also lifted 304% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's noticeably more attractive on an annualised basis.
In light of this, it's peculiar that TPC Consolidated's P/E sits below the majority of other companies. It looks like 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 TPC Consolidated currently trades on a much 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 significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for TPC Consolidated that you should be aware of.
Of course, you might also be able to find a better stock than TPC Consolidated. 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.
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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