It is no exaggeration to say that The (LON:HAS) price-to-earnings (or “P/E”) ratio of 17.3 seems pretty “average” at the moment compared to the UK market, where the median P/E is around 16. While this may not be surprising, if the P/E is not justified, investors could miss out on a potential opportunity or ignore an impending disappointment.
Hays may be in a better position as its earnings have been declining recently while most other companies have been reporting positive earnings growth. It could be that many are expecting the weak earnings performance to improve positively, which has prevented a decline in the P/E ratio. If not, existing shareholders may be a little nervous about the viability of the share price.
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How is Hays growing?
Hays’ P/E ratio would be typical of a company expected to deliver only moderate growth and, importantly, performance in line with the market.
Looking back, the last year has seen a frustrating 43% decline for the company. At least, thanks to the earlier growth phase, earnings per share overall have not fallen completely below where they were three years ago. So it’s fair to say that the company’s earnings growth has been inconsistent lately.
As for the outlook, the company is expected to deliver growth of 8.6% per year over the next three years, as estimated by the nine analysts covering the company. With the market expected to deliver growth of 15% per year, the company must expect a weaker result.
Given this information, we find it interesting that Hays is trading at a P/E ratio that is fairly similar to the market. Apparently, many investors in the company are less pessimistic than analysts indicate and are not willing to offload their shares at this time. Maintaining these prices will be difficult, as this level of earnings growth will likely weigh on the shares at some point.
The last word
It is argued that the price-to-earnings ratio is not a good measure of a company’s value in certain industries, but can be a meaningful indicator of business sentiment.
Our study of analyst forecasts for Hays found that the weaker earnings outlook is not impacting the P/E as much as we would have expected. At the moment, we are unhappy with the P/E as the forecast future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it is difficult to accept these prices as reasonable.
You always have to keep an eye on risks, for example: Hays has 2 warning signs In our opinion, you should be aware of this.
Naturally, You may also be able to find a better stock than Hays. You may want to see this free Collection of other companies that have reasonable P/E ratios and strong earnings growth.
Valuation is complex, but we are here to simplify it.
Find out if Hays is undervalued or overvalued with our detailed analysis, including Fair value estimates, potential risks, dividends, insider trading and the company’s financial condition.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
