It's A Story Of Risk Vs Reward With Beforepay Group Limited (ASX:B4P)

With a price-to-earnings (or "P/E") ratio of 16.4x Beforepay Group Limited (ASX:B4P) may be sending bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 22x and even P/E's higher than 40x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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Recent times have been advantageous for Beforepay Group as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Beforepay Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Beforepay Group.

How Is Beforepay Group's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Beforepay Group's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 89% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 23% each year over the next three years. With the market only predicted to deliver 18% each year, the company is positioned for a stronger earnings result.

With this information, we find it odd that Beforepay Group is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Beforepay Group'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 Beforepay Group currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

You need to take note of risks, for example - Beforepay Group has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Of course, you might also be able to find a better stock than Beforepay Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.