Running a filter on ASX-listed companies that have P/E ratios below 10x brings up more than 100 results.

A P/E ratio of under 10x generally indicates a cheap share price, but there can be a multitude of reasons why these companies are trading at low ratios.

Factors that need to be considered are how is the P/E ratio calculated? Is it using underlying earnings or have one-off items temporarily boosted earnings per share? Is the outlook for the company worse than the previous financial year?

Whatever the case, let’s take a look at 5 companies with low P/E ratios…

TFS Corporation Limited (ASX: TFC)

The Indian sandalwood plantation manager is trading on a P/E ratio of just 5.8x according to S&P Global Market Intelligence. But looking closely at the company’s latest financial results shows that its net profit of $90.1 million includes foreign exchange movements and an accounting gain on acquisition of Santalis & Viroxis. TFS’s actual cash net profit after tax was just $14.1 million – placing the company on a P/E ratio of over 36x. Rather than being cheap, TFS looks very expensive and investors might want to steer clear.

Collection House Limited (ASX: CLH)

The debt collector has had a torrid year with the share price sinking as low as 93 cents in April, before rebounding to the current price of $1.26. A weak outlook for purchased debt ledgers (PDLs) and higher costs were mainly to blame according to management, but it may not have been as bad as the market expected. As we wrote in July, the market may be underestimating the company. A low P/E ratio, in this case, may indicate a cheap company.

Qantas Airways Limited (ASX: QAN)

At the current share price of $3.30, Qantas shares are trading on a P/E ratio of just 6.7x – which doesn’t appear expensive. I can only suggest that the market expects earnings to deteriorate further in the year ahead – despite reporting record profits. The airline has benefitted from a halving in the oil price over the past two years but has also slashed costs heavily. Rising competition, both domestically and internationally, has already seen the airline forced to cut capacity this year, and its seems clear that the market expects the company to remain under pressure.

OTOC FPO (ASX: OTC)

A surveying, planning and design company recently reported a monster 246% increase in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for the 2016 financial year, but is still trading on a trailing P/E ratio of 4.1x. The company recently noted that it had a robust order book and continues to seek acquisitions and organic growth. Looks like one company to add to your watchlist.

 

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.