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The Algoma Steel Group Inc. (NASDAQ:ASTL) share price has done very well over the last month, posting an excellent gain of 30%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.5% in the last twelve months.
Although its price has surged higher, Algoma Steel Group's price-to-earnings (or "P/E") ratio of 2x might still make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 16x and even P/E's above 30x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Algoma Steel Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
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Does Growth Match The Low P/E?
In order to justify its P/E ratio, Algoma Steel Group would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered a frustrating 52% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 65% over the next year. With the market predicted to deliver 6.4% growth , that's a disappointing outcome.
With this information, we are not surprised that Algoma Steel Group 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
What We Can Learn From Algoma Steel Group's P/E?
Even after such a strong price move, Algoma Steel Group's P/E still trails the rest of the market significantly. 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.