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When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider Flexible Solutions International Inc. (NYSEMKT:FSI) as an attractive investment with its 10.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Flexible Solutions International 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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Is There Any Growth For Flexible Solutions International?
There's an inherent assumption that a company should underperform the market for P/E ratios like Flexible Solutions International's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 398% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 22% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next year should generate growth of 14% as estimated by the only analyst watching the company. With the market only predicted to deliver 4.4%, the company is positioned for a stronger earnings result.
With this information, we find it odd that Flexible Solutions International is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
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.
We've established that Flexible Solutions International currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.