Earnings Working Against Harvey Norman Holdings Limited's (ASX:HVN) Share Price

With a price-to-earnings (or "P/E") ratio of 15.4x Harvey Norman Holdings Limited (ASX:HVN) may be sending bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 18x and even P/E's higher than 33x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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With earnings growth that's superior to most other companies of late, Harvey Norman Holdings has been doing relatively well. 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.

Check out our latest analysis for Harvey Norman Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Harvey Norman Holdings.

How Is Harvey Norman Holdings' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Harvey Norman Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 47% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 4.5% per year as estimated by the eleven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 15% per year, which is noticeably more attractive.

With this information, we can see why Harvey Norman Holdings is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Harvey Norman Holdings' P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Harvey Norman 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Harvey Norman Holdings that you should be aware of.

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

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.