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With a price-to-earnings (or "P/E") ratio of 3.9x Mitie Group plc (LON:MTO) may be sending very bullish signals at the moment, given that almost half of all companies in the United Kingdom have P/E ratios greater than 16x and even P/E's higher than 29x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Mitie Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Mitie Group
Where Does Mitie Group's P/E Sit Within Its Industry?
We'd like to see if P/E's within Mitie Group's industry might provide some colour around the company's particularly low P/E ratio. It turns out the Commercial Services industry in general also has a P/E ratio lower than the market, as the graphic below shows. So we'd say there could be some merit in the premise that the company's ratio being shaped by its industry at this time. Ordinarily, the majority of companies' P/E's would be compressed by the general conditions within the Commercial Services industry. We'd highlight though, the spotlight should be on the anticipated direction of the company's earnings.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mitie Group.
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Mitie Group's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 78% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Shifting to the future, estimates from the five analysts covering the company suggest earnings growth will be highly resilient over the next year growing by 34%. With the rest of the market predicted to shrink by 15%, that would be a fantastic result.
With this information, we find it very odd that Mitie Group is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the contrarian forecasts and have been accepting significantly lower selling prices.