Yahoo Finance Insufficient Growth At Geneva Finance Limited (NZSE:GFL) Hampers Share Price
With a price-to-earnings (or "P/E") ratio of 12.3x Geneva Finance Limited (NZSE:GFL) may be sending bullish signals at the moment, given that almost half of all companies in New Zealand have P/E ratios greater than 16x and even P/E's higher than 32x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
For instance, Geneva Finance's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
See our latest analysis for Geneva Finance
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Geneva Finance's earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Geneva Finance's is when the company's growth is on track to lag the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 55%. As a result, earnings from three years ago have also fallen 58% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
In contrast to the company, the rest of the market is expected to grow by 8.8% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we are not surprised that Geneva Finance is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
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 Geneva Finance revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
We don't want to rain on the parade too much, but we did also find 5 warning signs for Geneva Finance (2 make us uncomfortable!) that you need to be mindful of.
If these risks are making you reconsider your opinion on Geneva Finance, explore our interactive list of high quality stocks to get an idea of what else is out there.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
