RH Bophelo Limited's (JSE:RHB) price-to-earnings (or "P/E") ratio of 5.6x might make it look like a buy right now compared to the market in South Africa, where around half of the companies have P/E ratios above 9x and even P/E's above 13x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
For example, consider that RH Bophelo's financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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 out of favour.
See our latest analysis for RH Bophelo
Although there are no analyst estimates available for RH Bophelo, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Does Growth Match The Low P/E?
In order to justify its P/E ratio, RH Bophelo would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 62%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 99% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
This is in contrast to the rest of the market, which is expected to grow by 14% over the next year, materially lower than the company's recent medium-term annualised growth rates.
With this information, we find it odd that RH Bophelo is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Final Word
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 RH Bophelo currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.
It is also worth noting that we have found 2 warning signs for RH Bophelo (1 is significant!) that you need to take into consideration.