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Prime Financial Group Limited's (ASX:PFG) Business And Shares Still Trailing The Market

With a price-to-earnings (or "P/E") ratio of 11.6x Prime Financial Group Limited (ASX:PFG) may be sending bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 16x and even P/E's higher than 30x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Earnings have risen firmly for Prime Financial Group recently, which is pleasing to see. 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 that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Prime Financial Group

Does Prime Financial Group Have A Relatively High Or Low P/E For Its Industry?

We'd like to see if P/E's within Prime Financial Group's industry might provide some colour around the company's low P/E ratio. The image below shows that the Capital Markets industry as a whole has a P/E ratio similar to the market. So it appears the company's ratio isn't really influenced by these industry numbers currently. Some industry P/E's don't move around a lot and right now most companies within the Capital Markets industry should be getting propped up. Ultimately though, it's going to be the fundamentals of the business like earnings and growth that count most.

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Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Prime Financial Group will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

Prime Financial Group's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 29% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 70% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 0.3% shows it's an unpleasant look.

In light of this, it's understandable that Prime Financial Group's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Final Word

The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Prime Financial Group revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 4 warning signs for Prime Financial Group you should be aware of, and 2 of them make us uncomfortable.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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.

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