Black Diamond Group Limited's (TSE:BDI) 36% Price Boost Is Out Of Tune With Earnings

Black Diamond Group Limited (TSE:BDI) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.5% over the last year.

In spite of the firm bounce in price, there still wouldn't be many who think Black Diamond Group's price-to-earnings (or "P/E") ratio of 11x is worth a mention when the median P/E in Canada is similar at about 10x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been advantageous for Black Diamond Group as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Our analysis indicates that BDI is potentially undervalued!

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

How Is Black Diamond Group's Growth Trending?

In order to justify its P/E ratio, Black Diamond Group would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 262% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the six analysts covering the company suggest earnings growth is heading into negative territory, declining 15% over the next year. Meanwhile, the broader market is forecast to expand by 11%, which paints a poor picture.

In light of this, it's somewhat alarming that Black Diamond Group's P/E sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

What We Can Learn From Black Diamond Group's P/E?

Black Diamond Group's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Black Diamond Group's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Black Diamond Group that we have uncovered.

If you're unsure about the strength of Black Diamond Group's 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. 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.