When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) above 20x, you may consider Barrett Business Services, Inc. (NASDAQ:BBSI) as an attractive investment with its 9.8x P/E ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Barrett Business Services has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You’d much rather the company wasn’t bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.free report on Barrett Business Services will help you uncover what’s on the horizon.
What Are Growth Metrics Telling Us About The Low P/E?
Barrett Business Services’ P/E ratio would be typical for a company that’s only expected to deliver limited growth, and importantly, perform worse than the market.
Retrospectively, the last year delivered a frustrating 7.5% decrease to the company’s bottom line. Even so, admirably EPS has lifted 138% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 25% as estimated by the three analysts watching the company. Meanwhile, the broader market is forecast to expand by 5.2%, which paints a poor picture.
In light of this, it’s understandable that Barrett Business Services’ P/E would sit below the majority of other companies. Nonetheless, there’s no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Final Word
It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Barrett Business Services’ analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn’t great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
There are also other vital risk factors to consider and we’ve discovered 2 warning signs for Barrett Business Services (1 can’t be ignored!) that you should be aware of before investing here.
If you’re unsure about the strength of Barrett Business Services’ business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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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