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Potential Upside For UP Global Sourcing Holdings plc (LON:UPGS) Not Without Risk

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When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 17x, you may consider UP Global Sourcing Holdings plc (LON:UPGS) as an attractive investment with its 11.6x 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.

UP Global Sourcing Holdings has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for UP Global Sourcing Holdings

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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 UP Global Sourcing Holdings' 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 low as UP Global Sourcing Holdings' is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. Still, incredibly EPS has fallen 15% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

It's interesting to note that the rest of the market is similarly expected to decline by 3.8% over the next year, which is just as bad as the company's recent medium-term earnings decline.

In light of this, the fact UP Global Sourcing Holdings' P/E sits below the majority of other companies is unanticipated but certainly not shocking. In general, shrinking earnings are unlikely to lead to a stable P/E long-term, which could set up shareholders for future disappointment regardless. Even just maintaining these prices will be difficult to achieve as recent earnings trends are already weighing down the shares heavily.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that UP Global Sourcing Holdings currently trades on a lower than expected P/E since its recent three-year earnings are matching the forecasts for a struggling market. There could be some further unobserved threats to earnings preventing the P/E ratio from matching this performance. Perhaps there is some hesitation about the company's ability to stay its recent medium-term course and resist further pain to its business from the broader market turmoil. It appears some are indeed anticipating earnings instability, because this relative performance should normally provide more support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with UP Global Sourcing Holdings, and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than UP Global Sourcing Holdings. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.