TSE:LNF) price-to-earnings (or “P/E”) ratio of 10.7x might make it look like a buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 18x and even P/E’s above 39x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it’s justified.” data-reactid=”28″>Leon’s Furniture Limited’s (TSE:LNF) price-to-earnings (or “P/E”) ratio of 10.7x might make it look like a buy right now compared to the market in Canada, where around half of the companies have P/E ratios above 18x and even P/E’s above 39x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it’s justified.

Earnings have risen firmly for Leon’s Furniture recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, 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.

Check out our latest analysis for Leon’s Furniture ” data-reactid=”30″> Check out our latest analysis for Leon’s Furniture

free report on Leon’s Furniture’s earnings, revenue and cash flow.” data-reactid=”47″>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 Leon’s Furniture’s earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Leon’s Furniture would need to produce sluggish growth that’s trailing the market.

Retrospectively, the last year delivered an exceptional 22{3e0544090c75b66d16c3eca4d142e2092ea98ee5f79f18046a1f13abafab9023} gain to the company’s bottom line. The latest three year period has also seen a 23{3e0544090c75b66d16c3eca4d142e2092ea98ee5f79f18046a1f13abafab9023} overall rise in EPS, aided extensively by its short-term performance. Therefore, it’s fair to say the earnings growth recently has been respectable for the company.

Weighing that recent medium-term earnings trajectory against the broader market’s one-year forecast for expansion of 7.2{3e0544090c75b66d16c3eca4d142e2092ea98ee5f79f18046a1f13abafab9023} shows it’s about the same on an annualised basis.

With this information, we find it odd that Leon’s Furniture is trading at a P/E lower than the market. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

The Bottom Line On Leon’s Furniture’s P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We’ve established that Leon’s Furniture currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company’s performance. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

Leon’s Furniture is showing 3 warning signs in our investment analysis, you should know about.” data-reactid=”56″>Having said that, be aware Leon’s Furniture is showing 3 warning signs in our investment analysis, you should know about.

our interactive list of high quality stocks to get an idea of what else is out there.” data-reactid=”57″>If these risks are making you reconsider your opinion on Leon’s Furniture, explore our interactive list of high quality stocks to get an idea of what else is out there.

Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”58″>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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