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Royal Mail plc’s (LON:RMG) price-to-earnings (or “P/E”) ratio of 11.5x might make it look like a buy right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios above 16x and even P/E’s above 32x 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.
With earnings that are retreating more than the market’s of late, Royal Mail has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you’d want its earnings trajectory to turn around before making any decisions. Or at the very least, you’d be hoping the earnings slide doesn’t get any worse if your plan is to pick up some stock while it’s out of favour.
Check out our latest analysis for Royal Mail
If you’d like to see what analysts are forecasting going forward, you should check out our free report on Royal Mail.
Is There Any Growth For Royal Mail?
In order to justify its P/E ratio, Royal Mail would need to produce sluggish growth that’s trailing the market.
If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 7.7%. This means it has also seen a slide in earnings over the longer-term as EPS is down 41% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to slump, contracting by 1.7% each year during the coming three years according to the ten analysts following the company. Meanwhile, the broader market is forecast to expand by 12% each year, which paints a poor picture.
With this information, we are not surprised that Royal Mail is trading at a P/E lower than the market. Nonetheless, there’s no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
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.
We’ve established that Royal Mail maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won’t provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
There are also other vital risk factors to consider before investing and we’ve discovered 1 warning sign for Royal Mail that you should be aware of.
You might be able to find a better investment than Royal Mail. 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. 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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