Abercrombie & Fitch Co.'s (NYSE:ANF) price-to-earnings (or "P/E") ratio of 14.9x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 34x 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.

With earnings growth that's superior to most other companies of late, Abercrombie & Fitch 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 you 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.

How Is Abercrombie & Fitch's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Abercrombie & Fitch's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 146% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 134% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 5.3% as estimated by the nine analysts watching the company. With the market predicted to deliver 15% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Abercrombie & Fitch 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.

The Bottom Line On Abercrombie & Fitch's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Abercrombie & Fitch's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Abercrombie & Fitch that you should be aware of.

If these risks are making you reconsider your opinion on Abercrombie & Fitch, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.