When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider GoDaddy Inc. (NYSE:GDDY) as an attractive investment with its 12.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

GoDaddy certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.

Is There Any Growth For GoDaddy?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 499% last year. The latest three year period has also seen an excellent 1,010% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 9.5% per annum during the coming three years according to the analysts following the company. That's not great when the rest of the market is expected to grow by 10% per year.

In light of this, it's understandable that GoDaddy's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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.

As we suspected, our examination of GoDaddy's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 4 warning signs for GoDaddy (of which 2 are a bit concerning!) you should know about.

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