Take Care Before Diving Into The Deep End On Colefax Group PLC (LON:CFX)

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Colefax Group PLC's (LON:CFX) price-to-earnings (or "P/E") ratio of 11.3x 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 30x 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.

For instance, Colefax Group's receding earnings in recent times would have to be some food for thought. 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.

See our latest analysis for Colefax Group

Does Colefax Group Have A Relatively High Or Low P/E For Its Industry?

An inspection of average P/E's throughout Colefax Group's industry may help to explain its low P/E ratio. You'll notice in the figure below that P/E ratios in the Consumer Durables industry are also lower than the market. So this certainly goes a fair way towards explaining the company's ratio right now. In the context of the Consumer Durables industry's current setting, most of its constituents' P/E's would be expected to be toned down. Ultimately though, it's going to be the fundamentals of the business like earnings and growth that count most.

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Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Colefax Group will help you shine a light on its historical performance.

How Is Colefax Group's Growth Trending?

Colefax Group's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 27% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 51% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

In contrast to the company, the rest of the market is expected to decline by 15% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

In light of this, it's quite peculiar that Colefax Group's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Colefax Group revealed its growing earnings over the medium-term aren't contributing to its P/E anywhere near as much as we would have predicted, given the market is set to shrink. We think potential risks might be placing significant pressure on the P/E ratio and share price. Perhaps there is some hesitation about the company's ability to stay its recent course and swim against the current of the broader market turmoil. At least the risk of a price drop looks to be subdued, but investors think future earnings could see a lot of volatility.

Before you settle on your opinion, we've discovered 1 warning sign for Colefax Group that you should be aware of.

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.

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