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When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 24x, you may consider Studio Retail Group plc (LON:STU) as a highly attractive investment with its 6.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Recent times have been advantageous for Studio Retail Group as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, 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.
Want the full picture on analyst estimates for the company? Then our free report on Studio Retail Group will help you uncover what's on the horizon.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Studio Retail Group would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered an exceptional 366% gain to the company's bottom line. Pleasingly, EPS has also lifted 69% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 16% per year over the next three years. That's shaping up to be materially lower than the 18% each year growth forecast for the broader market.
In light of this, it's understandable that Studio Retail Group's P/E sits below the majority of other companies. 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
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.
We've established that Studio Retail Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
Plus, you should also learn about this 1 warning sign we've spotted with Studio Retail Group.
Of course, you might also be able to find a better stock than Studio Retail Group. 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.
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