When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 20x, you may consider Saratoga Investment Corp. (NYSE:SAR) as a highly attractive investment with its 6.9x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Saratoga Investment has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.
Want the full picture on analyst estimates for the company? Then our free report on Saratoga Investment will help you uncover what's on the horizon.
Is There Any Growth For Saratoga Investment?
The only time you'd be truly comfortable seeing a P/E as depressed as Saratoga Investment's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. Still, the latest three year period has seen an excellent 58% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Turning to the outlook, the next three years should generate growth of 2.5% per year as estimated by the six analysts watching the company. With the market predicted to deliver 13% growth per annum, the company is positioned for a weaker earnings result.
With this information, we can see why Saratoga Investment is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Key Takeaway
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Saratoga Investment maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Before you settle on your opinion, we've discovered 4 warning signs for Saratoga Investment (1 can't be ignored!) that you should be aware of.
You might be able to find a better investment than Saratoga Investment. 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.
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