Fairfax Financial Holdings Limited's (TSE:FFH) Low P/E No Reason For Excitement

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 16x, you may consider Fairfax Financial Holdings Limited (TSE:FFH) as an attractive investment with its 8.8x 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 limited.

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Fairfax Financial Holdings 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.

View our latest analysis for Fairfax Financial Holdings

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

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Fairfax Financial Holdings would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 10% gain to the company's bottom line. Pleasingly, EPS has also lifted 53% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 11% each year as estimated by the six analysts watching the company. That's not great when the rest of the market is expected to grow by 9.5% per annum.

With this information, we are not surprised that Fairfax Financial Holdings is trading at a P/E lower than the market. 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 Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Fairfax Financial Holdings maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Fairfax Financial Holdings (1 is a bit concerning!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.