When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 20x, you may consider Hello Group Inc. (NASDAQ:MOMO) as a highly attractive investment with its 9.4x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Hello Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Hello Group will help you uncover what's on the horizon.

How Is Hello Group's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 40%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 21% during the coming year according to the nine analysts following the company. With the market only predicted to deliver 16%, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Hello Group's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

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.

Our examination of Hello Group's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Having said that, be aware Hello Group is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Hello Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.