What You Can Learn From Barratt Redrow plc's (LON:BTRW) P/E

With a price-to-earnings (or "P/E") ratio of 27.2x Barratt Redrow plc (LON:BTRW) may be sending very bearish signals at the moment, given that almost half of all companies in the United Kingdom have P/E ratios under 15x and even P/E's lower than 10x 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.

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With earnings growth that's superior to most other companies of late, Barratt Redrow has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Barratt Redrow

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

Is There Enough Growth For Barratt Redrow?

The only time you'd be truly comfortable seeing a P/E as steep as Barratt Redrow's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 15% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 74% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 44% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 16% each year, which is noticeably less attractive.

In light of this, it's understandable that Barratt Redrow's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

We've established that Barratt Redrow maintains its high P/E on the strength of its forecast growth being higher than the wider 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. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Barratt Redrow (1 is a bit concerning!) that you need to be mindful of.

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