Australian Finance Group Limited's (ASX:AFG) Earnings Haven't Escaped The Attention Of Investors

There wouldn't be many who think Australian Finance Group Limited's (ASX:AFG) price-to-earnings (or "P/E") ratio of 15.9x is worth a mention when the median P/E in Australia is similar at about 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Our free stock report includes 2 warning signs investors should be aware of before investing in Australian Finance Group. Read for free now.

With earnings growth that's inferior to most other companies of late, Australian Finance Group has been relatively sluggish. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

View our latest analysis for Australian Finance Group

Want the full picture on analyst estimates for the company? Then our free report on Australian Finance Group will help you uncover what's on the horizon.

How Is Australian Finance Group's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Australian Finance Group's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. This isn't what shareholders were looking for as it means they've been left with a 47% decline in EPS over the last three years in total. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 17% per year as estimated by the dual analysts watching the company. That's shaping up to be similar to the 15% per year growth forecast for the broader market.

With this information, we can see why Australian Finance Group is trading at a fairly similar P/E to the market. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

What We Can Learn From Australian Finance Group's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Australian Finance Group maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

Having said that, be aware Australian Finance Group is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.