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When searching for cheap FTSE shares, many investors lean on well-known valuation metrics such as the price-to-earnings (P/E) ratio or the price-to-book (P/B) ratio. These figures can offer a quick snapshot of how the market currently values a business relative to its profits or assets.
A low P/E might hint at a bargain — or it could be flashing a warning sign. That’s because these numbers alone don’t guarantee growth or a turnaround. They’re anchored in current or forecast earnings that depend on wider economic conditions, demand, supply chains and consumer habits. In other words, today’s ‘cheap’ stock might stay cheap if profits don’t recover.
Two FTSE shares currently stand out to me with P/E ratios under 7. But do they represent genuine bargains, or potential value traps?
The struggling private label goods giant
McBride (LSE: MCB) is Europe’s largest supplier of private label and contract-manufactured household cleaning products. From detergents to disinfectants, its goods fill the shelves of major supermarkets under own-brand labels.
Unfortunately, the company’s fortunes have plateaued. The share price tumbled 13% this week after its full-year trading update on 16 July revealed that operating profit will only be in line with expectations, largely due to a slowdown in demand for private label products.
This follows a price boost back in January, when McBride announced it would resume paying dividends. That’s a promising development that adds significant income value to the stock.
After the latest sell-off, it now trades on a rock-bottom P/E ratio of 5.8. That might seem tempting, but the relatively high P/B ratio of 2.8 tells a less comfortable story.
What’s more, the forward P/E has climbed to 6.3, implying earnings are expected to decline further.
If the group can’t reignite demand or carve out new growth avenues, it’s hard to see the share price staging a meaningful comeback. For now, I’d consider steering clear until management delivers a workable turnaround strategy.
A solid foundation
By contrast, I think Keller Group‘s (LSE: KLR) an undervalued stock worth considering. The FTSE 250 geotechnical specialist handles piling, grouting and ground engineering projects across the globe. Despite a subdued performance this year, the shares are still up an impressive 124% over five years.
Keller looks attractively valued, with a current P/E of 7.2 that drops to 6.8 on a forward basis, suggesting the market expects earnings to improve. That view’s supported by earnings per share rising a hefty 60% year on year.
Profit margins are modest, but a robust return on equity (ROE) of 25.6% underscores management’s efficiency. Meanwhile, Keller offers a 3.55% dividend yield with a low 25% payout ratio. With over two decades of uninterrupted dividend payments, it has shown resilience through multiple cycles.
Of course, risks remain. CEO Michael Speakman steps down in August, which could unsettle leadership. Deutsche Bank also recently downgraded the stock to Hold, trimming its price target by nearly 8%.
My view
For me, McBride looks like a value trap — a low P/E masking weak underlying demand. Keller, on the other hand, seems genuinely undervalued, with a track record of rising earnings, reliable dividends and a forward outlook that still points upward.
Among FTSE shares trading on low multiples, that’s exactly the combination I look for.
This story originally appeared on Motley Fool
