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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.
In spite of the firm bounce in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 16x, you may still consider Algoma Steel Group as a highly attractive investment with its 2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
While the market has experienced earnings growth lately, Algoma Steel Group's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.
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How Is Algoma Steel Group's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as depressed as Algoma Steel Group's is when the company's growth is on track to lag the market decidedly.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 52%. 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. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 65% as estimated by the four analysts watching the company. With the market predicted to deliver 6.4% growth , that's a disappointing outcome.
In light of this, it's understandable that Algoma Steel Group's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Bottom Line On Algoma Steel Group's P/E
Algoma Steel Group's recent share price jump still sees its P/E sitting firmly flat on the ground. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.