Yahoo Finance Why Investors Shouldn't Be Surprised By Benjamin Hornigold Limited's (ASX:BHD) Low P/E
With a price-to-earnings (or "P/E") ratio of 6.9x Benjamin Hornigold Limited (ASX:BHD) may be sending very bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 19x and even P/E's higher than 37x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times have been quite advantageous for Benjamin Hornigold as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Benjamin Hornigold
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Benjamin Hornigold will help you shine a light on its historical performance.
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Benjamin Hornigold's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 64%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
This is in contrast to the rest of the market, which is expected to grow by 22% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that Benjamin Hornigold's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Key Takeaway
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Benjamin Hornigold revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Before you settle on your opinion, we've discovered 3 warning signs for Benjamin Hornigold (2 make us uncomfortable!) that you should be aware of.
Of course, you might also be able to find a better stock than Benjamin Hornigold. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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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.
