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With a price-to-earnings (or "P/E") ratio of 3.2x Bushveld Minerals Limited (LON:BMN) may be sending very bullish signals at the moment, given that almost half of all companies in the United Kingdom have P/E ratios greater than 18x and even P/E's higher than 36x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
With earnings growth that's exceedingly strong of late, Bushveld Minerals has been doing very well. 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.
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Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as Bushveld Minerals' is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered an exceptional 90% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Comparing that to the market, which is predicted to shrink 1.6% in the next 12 months, the company's positive momentum based on recent medium-term earnings results is a bright spot for the moment.
In light of this, it's quite peculiar that Bushveld Minerals' P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Key Takeaway
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of Bushveld Minerals revealed its growing earnings over the medium-term aren't contributing to its P/E anywhere near as much as we would have predicted, given the market is set to shrink. We think potential risks might be placing significant pressure on the P/E ratio and share price. Perhaps there is some hesitation about the company's ability to stay its recent course and swim against the current of the broader market turmoil. At least the risk of a price drop looks to be subdued, but investors think future earnings could see a lot of volatility.