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Earnings Working Against Ricardo plc's (LON:RCDO) Share Price

Simply Wall St
·3-min read

Ricardo plc's (LON:RCDO) price-to-earnings (or "P/E") ratio of 10.1x might make it look like a 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 35x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Ricardo 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 Ricardo

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

Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a worthy increase of 4.6%. However, this wasn't enough as the latest three year period has seen an unpleasant 27% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 0.6% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 14% per annum, which is noticeably more attractive.

In light of this, it's understandable that Ricardo'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.

What We Can Learn From Ricardo's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Ricardo's analyst forecasts revealed that its inferior earnings outlook 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 3 warning signs for Ricardo that you need to take into consideration.

If you're unsure about the strength of Ricardo's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.