Nick Scali Limited's (ASX:NCK) Share Price Could Signal Some Risk
With a median price-to-earnings (or "P/E") ratio of close to 16x in Australia, you could be forgiven for feeling indifferent about Nick Scali Limited's (ASX:NCK) P/E ratio of 16.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
While the market has experienced earnings growth lately, Nick Scali's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.
See our latest analysis for Nick Scali
Keen to find out how analysts think Nick Scali's future stacks up against the industry? In that case, our free report is a great place to start.
What Are Growth Metrics Telling Us About The P/E?
Nick Scali's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.
If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Fortunately, a few good years before that means that it was still able to grow EPS by 13% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 0.03% per annum as estimated by the twin analysts watching the company. That's shaping up to be materially lower than the 11% per annum growth forecast for the broader market.
With this information, we find it interesting that Nick Scali is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Bottom Line On Nick Scali's P/E
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 Nick Scali currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
There are also other vital risk factors to consider and we've discovered 4 warning signs for Nick Scali (1 is potentially serious!) that you should be aware of before investing here.
You might be able to find a better investment than Nick Scali. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
