Some Shareholders Feeling Restless Over Super Retail Group Limited's (ASX:SUL) P/E Ratio

There wouldn't be many who think Super Retail Group Limited's (ASX:SUL) price-to-earnings (or "P/E") ratio of 16.1x is worth a mention when the median P/E in Australia is similar at about 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

While the market has experienced earnings growth lately, Super Retail Group's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Super Retail Group

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

How Is Super Retail Group's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Super Retail Group's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 2.1% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 36% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 7.0% each year during the coming three years according to the nine analysts following the company. That's shaping up to be materially lower than the 13% each year growth forecast for the broader market.

In light of this, it's curious that Super Retail Group's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From Super Retail Group's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Super Retail Group currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Super Retail Group.

If you're unsure about the strength of Super Retail Group'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.

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