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Frasers Group plc's (LON:FRAS) price-to-earnings (or "P/E") ratio of 13.9x 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 34x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
Frasers Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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 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.
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How Is Frasers Group's Growth Trending?
In order to justify its P/E ratio, Frasers Group would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 232% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 37% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the four analysts covering the company are not good at all, suggesting earnings should decline by 41% over the next year. With the rest of the market predicted to shrink by 5.0%, it's a sub-optimal result.
With this information, it's not too hard to see why Frasers Group is trading at a lower P/E in comparison. Nonetheless, with earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. Even just maintaining these prices could be difficult achieve as the weak outlook is already weighing down the shares heavily.
The Bottom Line On Frasers Group's P/E
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 Frasers Group's analyst forecasts revealed that its even shakier outlook against the market 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. Although, we would be concerned whether the company can even maintain this level of performance under these tough market conditions. In the meantime, unless the company's prospects improve they will continue to form a barrier for the share price around these levels.