When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") above 20x, you may consider National Tyre & Wheel Limited (ASX:NTD) as an attractive investment with its 13x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
As an illustration, earnings have deteriorated at National Tyre & Wheel over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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.
View our latest analysis for National Tyre & Wheel
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 National Tyre & Wheel's earnings, revenue and cash flow.
Does Growth Match The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like National Tyre & Wheel's to be considered reasonable.
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 29%. The last three years don't look nice either as the company has shrunk EPS by 46% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's an unpleasant look.
In light of this, it's understandable that National Tyre & Wheel's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.
The Key Takeaway
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 National Tyre & Wheel maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 4 warning signs for National Tyre & Wheel that you need to be mindful of.
You might be able to find a better investment than National Tyre & Wheel. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.
September 09, 2020 at 11:20AM
https://finance.yahoo.com/news/national-tyre-wheel-limiteds-asx-035101695.html
National Tyre & Wheel Limited's (ASX:NTD) Low P/E No Reason For Excitement - Yahoo Finance
https://news.google.com/search?q=Wheel&hl=en-US&gl=US&ceid=US:en
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