Bremworth Limited (NZSE:BRW) Not Doing Enough For Some Investors As Its Shares Slump 26%

Bremworth Limited (NZSE:BRW) shares have had a horrible month, losing 26% after a relatively good period beforehand. Longer-term, the stock has been solid despite a difficult 30 days, gaining 12% in the last year.

In spite of the heavy fall in price, Bremworth may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 3.1x, since almost half of all companies in New Zealand have P/E ratios greater than 18x and even P/E's higher than 31x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Bremworth has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, 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.

Check out our latest analysis for Bremworth

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Bremworth's earnings, revenue and cash flow.

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

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

Retrospectively, the last year delivered an exceptional 375% 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.

This is in contrast to the rest of the market, which is expected to grow by 18% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Bremworth is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Having almost fallen off a cliff, Bremworth's share price has pulled its P/E way down as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Bremworth revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 3 warning signs for Bremworth (1 is a bit unpleasant!) that you should be aware of.

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