With a price-to-earnings (or "P/E") ratio of 3x Avis Budget Group, Inc. (NASDAQ:CAR) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 32x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Avis Budget Group has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

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

The only time you'd be truly comfortable seeing a P/E as depressed as Avis Budget Group's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 44% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to slump, contracting by 27% per year during the coming three years according to the seven analysts following the company. With the market predicted to deliver 10% growth each year, that's a disappointing outcome.

With this information, we are not surprised that Avis Budget Group is trading at a P/E lower than the market. 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 Avis Budget Group's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Avis Budget Group 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.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Avis Budget Group (of which 3 can't be ignored!) you should know about.

Of course, you might also be able to find a better stock than Avis Budget Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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