With a price-to-earnings (or "P/E") ratio of 7.9x Universal Logistics Holdings, Inc. (NASDAQ:ULH) 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 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 so limited.

The recently shrinking earnings for Universal Logistics Holdings have been in line with the market. One possibility is that the P/E is low because investors think the company's earnings may begin to slide even faster. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. At the very least, you'd be hoping that earnings don't fall off a cliff if your plan is to pick up some stock while it's out of favour.

Is There Any Growth For Universal Logistics Holdings?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.5%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 69% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 6.6% during the coming year according to the one analyst following 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 Universal Logistics Holdings is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Universal Logistics Holdings' 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 Universal Logistics Holdings maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

Plus, you should also learn about this 1 warning sign we've spotted with Universal Logistics Holdings.

You might be able to find a better investment than Universal Logistics Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com