EBOS Group Limited's (NZSE:EBO) Popularity With Investors Is Under Threat From Overpricing

With a price-to-earnings (or "P/E") ratio of 28.2x EBOS Group Limited (NZSE:EBO) may be sending very bearish signals at the moment, given that almost half of all companies in New Zealand have P/E ratios under 18x and even P/E's lower than 12x 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.

We've discovered 1 warning sign about EBOS Group. View them for free.

EBOS Group's negative earnings growth of late has neither been better nor worse than most other companies. It might be that many expect the company's earnings to strengthen positively despite the tough market conditions, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for EBOS Group

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Is There Enough Growth For EBOS Group?

In order to justify its P/E ratio, EBOS Group would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.4%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the eleven analysts watching the company. That's shaping up to be materially lower than the 18% per year growth forecast for the broader market.

In light of this, it's alarming that EBOS Group's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

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.

Our examination of EBOS Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for EBOS Group that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.