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Spectris plc (LON:SXS) Not Doing Enough For Some Investors

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Simply Wall St
·3 min read
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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 Spectris plc (LON:SXS) as an attractive investment with its 13.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Spectris certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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 Spectris

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on Spectris.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Spectris' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 340% last year. The latest three year period has also seen an excellent 1,882% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 18% each year during the coming three years according to the analysts following the company. That's not great when the rest of the market is expected to grow by 12% each year.

In light of this, it's understandable that Spectris' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Spectris' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Spectris you should know about.

You might be able to find a better investment than Spectris. 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.