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Why Investors Shouldn't Be Surprised By De La Rue plc's (LON:DLAR) Low P/E

Simply Wall St
·3 min read

De La Rue plc's (LON:DLAR) price-to-earnings (or "P/E") ratio of 4.7x might make it look like a strong buy right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios above 17x and even P/E's above 33x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for De La Rue as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for De La Rue

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Keen to find out how analysts think De La Rue's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 72% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 30% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 13% each year over the next three years. Meanwhile, the broader market is forecast to expand by 12% each year, which paints a poor picture.

With this information, we are not surprised that De La Rue is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From De La Rue's P/E?

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

We've established that De La Rue maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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 4 warning signs for De La Rue (of which 3 are potentially serious!) you should know about.

If these risks are making you reconsider your opinion on De La Rue, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.