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With a price-to-earnings (or "P/E") ratio of 31.9x BQE Water Inc. (CVE:BQE) may be sending very bearish signals at the moment, given that almost half of all companies in Canada have P/E ratios under 13x and even P/E's lower than 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Earnings have risen firmly for BQE Water recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
How Does BQE Water's P/E Ratio Compare To Its Industry Peers?
We'd like to see if P/E's within BQE Water's industry might provide some colour around the company's particularly high P/E ratio. It turns out the Commercial Services industry in general also has a P/E ratio significantly higher than the market, as the graphic below shows. So this certainly goes a fair way towards explaining the company's ratio right now. Ordinarily, the majority of companies' P/E's would be lifted firmly by the general conditions within the Commercial Services industry. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.
Although there are no analyst estimates available for BQE Water, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as BQE Water's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings growth, the company posted a worthy increase of 9.3%. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 8.3% shows it's a great look while it lasts.
In light of this, it's understandable that BQE Water's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse. Nonetheless, with most other businesses facing an uphill battle, staying on its current earnings path is no certainty.
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.
As we suspected, our examination of BQE Water revealed its growing earnings over the medium-term are contributing to its high P/E, given the market is set to shrink. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. We still remain cautious about the company's ability to stay its recent course and swim against the current of the broader market turmoil. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.
We don't want to rain on the parade too much, but we did also find 2 warning signs for BQE Water that you need to be mindful of.
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 P/E ratio below 20x).
This article by Simply Wall St is general in nature. 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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