WestStar Industrial Limited's (ASX:WSI) price-to-earnings (or "P/E") ratio of 4.3x might make it look like a strong buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 22x and even P/E's above 41x 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 so limited.
WestStar Industrial certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Although there are no analyst estimates available for WestStar Industrial, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Is There Any Growth For WestStar Industrial?
There's an inherent assumption that a company should far underperform the market for P/E ratios like WestStar Industrial's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 142% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's noticeably less attractive on an annualised basis.
In light of this, it's understandable that WestStar Industrial's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
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.
As we suspected, our examination of WestStar Industrial revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
And what about other risks? Every company has them, and we've spotted 3 warning signs for WestStar Industrial (of which 1 is potentially serious!) you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.
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 firstname.lastname@example.org.