With a price-to-earnings (or "P/E") ratio of 48.4x Gage Roads Brewing Co. Limited (ASX:GRB) may be sending very bearish signals at the moment, given that almost half of all companies in Australia have P/E ratios under 15x and even P/E's lower than 9x 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.
Gage Roads Brewing hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, 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.
Does Gage Roads Brewing Have A Relatively High Or Low P/E For Its Industry?
An inspection of average P/E's throughout Gage Roads Brewing's industry may help to explain its particularly high P/E ratio. You'll notice in the figure below that P/E ratios in the Beverage industry are also higher than the market. So it appears the company's ratio could be influenced somewhat by these industry numbers currently. Ordinarily, the majority of companies' P/E's would be lifted by the general conditions within the Beverage industry. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.
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What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Gage Roads Brewing would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 66%. This means it has also seen a slide in earnings over the longer-term as EPS is down 62% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the only analyst covering the company suggest earnings growth will be highly resilient over the next year growing by 98%. Meanwhile, the broader market is forecast to contract by 0.05%, which would indicate the company is doing very well.
In light of this, it's understandable that Gage Roads Brewing's P/E sits above the majority of other companies. At this time, shareholders aren't keen to offload something that is potentially eyeing a much more prosperous future.
What We Can Learn From Gage Roads Brewing's P/E?
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 Gage Roads Brewing maintains its high P/E on the strength of its forecast growth potentially beating a struggling market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Otherwise, it's hard to see the share price falling strongly in the near future under the current growth expectations.
Before you settle on your opinion, we've discovered 5 warning signs for Gage Roads Brewing (1 can't be ignored!) that you should be aware of.
You might be able to find a better investment than Gage Roads Brewing. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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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