There's Reason For Concern Over Brisbane Broncos Limited's (ASX:BBL) Price

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There wouldn't be many who think Brisbane Broncos Limited's (ASX:BBL) price-to-earnings (or "P/E") ratio of 17.5x is worth a mention when the median P/E in Australia is similar at about 16x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Earnings have risen firmly for Brisbane Broncos recently, which is pleasing to see. It might be that many expect the respectable earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

See our latest analysis for Brisbane Broncos

How Does Brisbane Broncos' P/E Ratio Compare To Its Industry Peers?

It's plausible that Brisbane Broncos' fairly average P/E ratio could be a result of tendencies within its own industry. It turns out the Entertainment industry in general has a P/E ratio significantly higher than the market, as the graphic below shows. So unfortunately this doesn't provide much to explain the company's ratio at all right now. Ordinarily, the majority of companies' P/E's would be lifted firmly by the general conditions within the Entertainment industry. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.

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Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Brisbane Broncos will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Brisbane Broncos' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.5% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 19% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to decline by 0.1% over the next year, or less than the company's recent medium-term annualised earnings decline.

With this information, it's perhaps strange that Brisbane Broncos is trading at a fairly similar P/E in comparison. With earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

What We Can Learn From Brisbane Broncos' P/E?

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.

We've established that Brisbane Broncos currently trades on a higher than expected P/E since its recent three-year earnings are even worse than the forecasts for a struggling market. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough market conditions. This would place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Brisbane Broncos that you need to be mindful of.

If you're unsure about the strength of Brisbane Broncos' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

This article by Simply Wall St is general in nature. 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.

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