Investors Don't See Light At End Of Genworth Financial, Inc.'s (NYSE:GNW) Tunnel

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider Genworth Financial, Inc. (NYSE:GNW) as a highly attractive investment with its 8.9x 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 so limited.

Genworth Financial certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Genworth Financial

Although there are no analyst estimates available for Genworth Financial, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Genworth Financial's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 339% gain to the company's bottom line. Still, incredibly EPS has fallen 55% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 14% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that Genworth Financial's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

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 Genworth Financial maintains its low P/E on the weakness of its sliding earnings over the medium-term, 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 the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 1 warning sign for Genworth Financial you should be aware of.

If these risks are making you reconsider your opinion on Genworth Financial, 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.