When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider A-Mark Precious Metals, Inc. (NASDAQ:AMRK) as a highly attractive investment with its 6.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
With earnings that are retreating more than the market's of late, A-Mark Precious Metals 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. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as A-Mark Precious Metals' is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 11% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
Turning to the outlook, the next three years should generate growth of 9.0% per annum as estimated by the four analysts watching the company. With the market predicted to deliver 10% growth per year, the company is positioned for a comparable earnings result.
With this information, we find it odd that A-Mark Precious Metals is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that A-Mark Precious Metals currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
You should always think about risks. Case in point, we've spotted 4 warning signs for A-Mark Precious Metals you should be aware of, and 1 of them can't be ignored.
If you're unsure about the strength of A-Mark Precious Metals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.