Reynolds Consumer Products Inc.'s (NASDAQ:REYN) 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 18x and even P/E's above 31x 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, Reynolds Consumer Products has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 18%. As a result, it also grew EPS by 8.5% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 3.8% per annum during the coming three years according to the seven analysts following the company. With the market predicted to deliver 11% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why Reynolds Consumer Products 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.

The Key Takeaway

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 Reynolds Consumer Products' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

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

You might be able to find a better investment than Reynolds Consumer Products. 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).

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