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Integrated Diagnostics Holdings plc's (LON:IDHC) price-to-earnings (or "P/E") ratio of 7.6x 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 14x and even P/E's above 27x 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.
Recent times have been advantageous for Integrated Diagnostics Holdings as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.
View our latest analysis for Integrated Diagnostics Holdings
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Integrated Diagnostics Holdings.
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Integrated Diagnostics Holdings' to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 69%. The strong recent performance means it was also able to grow EPS by 171% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 3.6% per year as estimated by the seven analysts watching the company. That's shaping up to be materially lower than the 10% each year growth forecast for the broader market.
In light of this, it's understandable that Integrated Diagnostics Holdings' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
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.
As we suspected, our examination of Integrated Diagnostics Holdings' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.