Restaurant Brands New Zealand Limited's (NZSE:RBD) Shares Leap 26% Yet They're Still Not Telling The Full Story

Restaurant Brands New Zealand Limited (NZSE:RBD) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.

In spite of the firm bounce in price, Restaurant Brands New Zealand may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.6x, since almost half of all companies in New Zealand have P/E ratios greater than 21x and even P/E's higher than 36x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been pleasing for Restaurant Brands New Zealand as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Restaurant Brands New Zealand

Keen to find out how analysts think Restaurant Brands New Zealand's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Restaurant Brands New Zealand's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 40%. Still, incredibly EPS has fallen 51% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 18% each year over the next three years. That's shaping up to be similar to the 18% each year growth forecast for the broader market.

In light of this, it's peculiar that Restaurant Brands New Zealand's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Bottom Line On Restaurant Brands New Zealand's P/E

Restaurant Brands New Zealand's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Restaurant Brands New Zealand's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

It is also worth noting that we have found 2 warning signs for Restaurant Brands New Zealand (1 makes us a bit uncomfortable!) that you need to take into consideration.

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 low P/E).

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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.