When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider SLM Corporation (NASDAQ:SLM) as a highly attractive investment with its 6.9x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

SLM certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Is There Any Growth For SLM?

In order to justify its P/E ratio, SLM would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 81%. The latest three year period has also seen a 7.8% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.0% per annum as estimated by the seven analysts watching the company. That's not great when the rest of the market is expected to grow by 10% per annum.

In light of this, it's understandable that SLM's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On SLM's P/E

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.

We've established that SLM 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware SLM is showing 4 warning signs in our investment analysis, and 3 of those are a bit unpleasant.

If you're unsure about the strength of SLM's 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.

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