Victorian Plumbing Group plc’s (LON:VIC) price-to-earnings (or “P/E”) ratio of 22.2x might make it look like a strong sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 14x and even P/E’s below 8x 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 so lofty.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Victorian Plumbing Group has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
See our latest analysis for Victorian Plumbing Group
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Keen to find out how analysts think Victorian Plumbing Group’s future stacks up against the industry? In that case, our free report is a great place to start.
What Are Growth Metrics Telling Us About The High P/E?
There’s an inherent assumption that a company should far outperform the market for P/E ratios like Victorian Plumbing Group’s to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 23% last year. Despite this strong recent growth, it’s still struggling to catch up as its three-year EPS frustratingly shrank by 51% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 39% as estimated by the five analysts watching the company. Meanwhile, the broader market is forecast to expand by 13%, which paints a poor picture.
In light of this, it’s alarming that Victorian Plumbing Group’s P/E sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort’s pessimism and aren’t willing to let go of their stock at any price. There’s a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.
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The Final Word
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.
We’ve established that Victorian Plumbing Group currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it’s very challenging to accept these prices as being reasonable.
A lot of potential risks can sit within a company’s balance sheet. Our free balance sheet analysis for Victorian Plumbing Group with six simple checks will allow you to discover any risks that could be an issue.
It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.
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