Earnings Working Against BT Group plc's (LON:BT.A) Share Price

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") above 15x, you may consider BT Group plc (LON:BT.A) as a highly attractive investment with its 6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, BT Group has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for BT Group

Want the full picture on analyst estimates for the company? Then our free report on BT Group will help you uncover what's on the horizon.

How Is BT Group's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like BT Group's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.7% last year. EPS has also lifted 24% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 6.0% each year during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 12% per year, which paints a poor picture.

With this information, we are not surprised that BT Group is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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.

As we suspected, our examination of BT Group's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for BT Group (of which 1 is potentially serious!) you should know about.

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