BT Brands, Inc.'s (NASDAQ:BTBD) Stock Retreats 30% But Earnings Haven't Escaped The Attention Of Investors

To the annoyance of some shareholders, BT Brands, Inc. (NASDAQ:BTBD) shares are down a considerable 30% in the last month, which continues a horrid run for the company. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

In spite of the heavy fall in price, BT Brands may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 24.8x, since almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x 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 so lofty.

The recent earnings growth at BT Brands would have to be considered satisfactory if not spectacular. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for BT Brands

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 BT Brands' earnings, revenue and cash flow.

How Is BT Brands' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as BT Brands' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 2.8% gain to the company's bottom line. Pleasingly, EPS has also lifted 1,406% 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 done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.8% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that BT Brands' P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From BT Brands' P/E?

A significant share price dive has done very little to deflate BT Brands' very lofty P/E. 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.

We've established that BT Brands maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with BT Brands (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on BT Brands, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.