Investors Aren't Buying Good Times Restaurants Inc.'s (NASDAQ:GTIM) Earnings
Good Times Restaurants Inc. (NASDAQ:GTIM) has a low P/E ratio of 14x, suggesting it may be undervalued compared to the market average. Despite a 14% EPS growth last year, the company's overall growth has been stagnant over the past three years, leading to investor skepticism about future performance. Analysts expect the broader market to grow by 15%, which further explains the low P/E. Investors are cautious, anticipating continued limited growth, and have identified two warning signs regarding the company's future prospects.
Explore Good Times Restaurants's Fair Values from the Community and select yours
Good Times Restaurants Inc.'s (NASDAQ:GTIM) price-to-earnings (or "P/E") ratio of 14x 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 20x and even P/E's above 35x 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.
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Good Times Restaurants has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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.
Check out our latest analysis for Good Times Restaurants
Although there are no analyst estimates available for Good Times Restaurants, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Is There Any Growth For Good Times Restaurants?
There's an inherent assumption that a company should underperform the market for P/E ratios like Good Times Restaurants' to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
This is in contrast to the rest of the market, which is expected to grow by 15% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that Good Times Restaurants' P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
What We Can Learn From Good Times Restaurants' P/E?
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Good Times Restaurants revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Good Times Restaurants, and understanding them should be part of your investment process.
If these risks are making you reconsider your opinion on Good Times Restaurants, explore our interactive list of high quality stocks to get an idea of what else is out there.
