River and Mercantile Group PLC (LON:RIV) Not Flying Under The Radar

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 21x, you may consider River and Mercantile Group PLC (LON:RIV) as a stock to potentially avoid with its 24.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

River and Mercantile Group has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for River and Mercantile Group

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

Is There Enough Growth For River and Mercantile Group?

In order to justify its P/E ratio, River and Mercantile Group would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 61% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 61% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 30% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 20% per annum, which is noticeably less attractive.

With this information, we can see why River and Mercantile Group is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that River and Mercantile Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

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

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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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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