Gale Pacific Limited's (ASX:GAP) Price Is Right But Growth Is Lacking

Gale Pacific Limited's (ASX:GAP) price-to-earnings (or "P/E") ratio of 12.8x might make it look like a buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 18x and even P/E's above 35x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For example, consider that Gale Pacific's financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Gale Pacific

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Although there are no analyst estimates available for Gale Pacific, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For Gale Pacific?

Gale Pacific's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 43%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 13% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Gale Pacific's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Gale Pacific maintains its low P/E on the weakness of its recentthree-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 6 warning signs for Gale Pacific (2 don't sit too well with us!) that you need to take into consideration.

If you're unsure about the strength of Gale Pacific's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

This article by Simply Wall St is general in nature. 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.

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