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There wouldn't be many who think Motorpoint Group plc's (LON:MOTR) price-to-earnings (or "P/E") ratio of 18x is worth a mention when the median P/E in the United Kingdom is similar at about 16x. 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.
For instance, Motorpoint Group's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
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Does Growth Match The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Motorpoint Group's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 9.1% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 89% 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.
Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 6.3% shows it's a great look while it lasts.
With this information, we find it odd that Motorpoint Group is trading at a fairly similar P/E to the market. It looks like most investors are not convinced the company can maintain its recent positive growth rate in the face of a shrinking broader market.
The Bottom Line On Motorpoint 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.
We've established that Motorpoint Group currently trades on a lower than expected P/E since its recent three-year earnings growth is beating forecasts for a struggling market. When we see its superior earnings with some actual growth, we assume potential risks are what might be placing pressure on the P/E ratio. Perhaps there is some hesitation about the company's ability to stay its recent course and swim against the current of the broader market turmoil. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.