Despite an already strong run, General Capital Limited (NZSE:GEN) shares have been powering on, with a gain of 43% in the last thirty days. The last month tops off a massive increase of 124% in the last year.
In spite of the firm bounce in price, General Capital's price-to-earnings (or "P/E") ratio of 11.6x might still make it look like a buy right now compared to the market in New Zealand, where around half of the companies have P/E ratios above 17x and even P/E's above 27x 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.
General Capital 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 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.
Check out our latest analysis for General Capital
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 General Capital's earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like General Capital's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 244%. The strong recent performance means it was also able to grow EPS by 3,946% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 3.0% shows it's noticeably more attractive on an annualised basis.
In light of this, it's peculiar that General Capital's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.
What We Can Learn From General Capital's P/E?
The latest share price surge wasn't enough to lift General Capital's P/E close to the market median. 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.
Our examination of General Capital revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
It is also worth noting that we have found 2 warning signs for General Capital that you need to take into consideration.
You might be able to find a better investment than General Capital. 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).
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
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