Brickworks Limited's (ASX:BKW) Business And Shares Still Trailing The Market

Brickworks Limited's (ASX:BKW) price-to-earnings (or "P/E") ratio of 10.5x might make it look like a buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 19x and even P/E's above 38x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times haven't been advantageous for Brickworks as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. 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.

View our latest analysis for Brickworks

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

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Brickworks would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 54%. Regardless, EPS has managed to lift by a handy 27% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 14% each year as estimated by the nine analysts watching the company. That's not great when the rest of the market is expected to grow by 17% per year.

In light of this, it's understandable that Brickworks' 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 Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Brickworks maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Brickworks is showing 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored.

Of course, you might also be able to find a better stock than Brickworks. 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.