Earnings Tell The Story For Equiniti Group plc (LON:EQN)

With a median price-to-earnings (or "P/E") ratio of close to 17x in the United Kingdom, you could be forgiven for feeling indifferent about Equiniti Group plc's (LON:EQN) P/E ratio of 18.1x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings that are retreating more than the market's of late, Equiniti Group has been very sluggish. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Equiniti Group

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Want the full picture on analyst estimates for the company? Then our free report on Equiniti Group will help you uncover what's on the horizon.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Equiniti Group's is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 12%. This means it has also seen a slide in earnings over the longer-term as EPS is down 40% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 14% each year as estimated by the six analysts watching the company. With the market predicted to deliver 15% growth each year, the company is positioned for a comparable earnings result.

In light of this, it's understandable that Equiniti Group's P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Equiniti Group's analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless these conditions change, they will continue to support the share price at these levels.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Equiniti Group you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E 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.

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