When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Ritchie Bros. Auctioneers Incorporated (NYSE:RBA) as a stock to avoid entirely with its 37.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Recent times haven't been advantageous for Ritchie Bros. Auctioneers as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.NYSE:RBA Price Based on Past Earnings July 27th 2021 free report is a great place to start
Is There Enough Growth For Ritchie Bros. Auctioneers?
Ritchie Bros. Auctioneers' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. Pleasingly, EPS has also lifted 110% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 15% per annum during the coming three years according to the nine analysts following the company. With the market predicted to deliver 14% growth each year, the company is positioned for a comparable earnings result.
With this information, we find it interesting that Ritchie Bros. Auctioneers is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Ritchie Bros. Auctioneers' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places 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 2 warning signs for Ritchie Bros. Auctioneers that you need to be mindful of.
If you're unsure about the strength of Ritchie Bros. Auctioneers' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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