Build-A-Bear Workshop, Inc. (NYSE:BBW) Surges 33% Yet Its Low P/E Is No Reason For Excitement

Build-A-Bear Workshop, Inc. (NYSE:BBW) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may still consider Build-A-Bear Workshop as a highly attractive investment with its 7.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Build-A-Bear Workshop 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Build-A-Bear Workshop

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Build-A-Bear Workshop would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 5.9% per annum as estimated by the three analysts watching the company. With the market predicted to deliver 10% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Build-A-Bear Workshop is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Even after such a strong price move, Build-A-Bear Workshop's P/E still trails the rest of the market significantly. 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 Build-A-Bear Workshop maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Build-A-Bear Workshop with six simple checks on some of these key factors.

You might be able to find a better investment than Build-A-Bear Workshop. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.