Deneb Investments Limited's (JSE:DNB) price-to-earnings (or "P/E") ratio of 6.2x might make it look like a buy right now compared to the market in South Africa, where around half of the companies have P/E ratios above 9x and even P/E's above 14x 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.
For instance, Deneb Investments' receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
View our latest analysis for Deneb Investments
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 Deneb Investments' earnings, revenue and cash flow.
Is There Any Growth For Deneb Investments?
Deneb Investments' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than 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 3.0%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 654% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Comparing that to the market, which is only predicted to deliver 5.7% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
With this information, we find it odd that Deneb Investments is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Final Word
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Deneb Investments currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.