Barloworld Limited's (JSE:BAW) Shares Climb 44% But Its Business Is Yet to Catch Up

Barloworld Limited (JSE:BAW) shareholders would be excited to see that the share price has had a great month, posting a 44% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.3% in the last twelve months.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Barloworld's P/E ratio of 8.3x, since the median price-to-earnings (or "P/E") ratio in South Africa is also close to 8x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been advantageous for Barloworld as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.

View our latest analysis for Barloworld

Want the full picture on analyst estimates for the company? Then our free report on Barloworld will help you uncover what's on the horizon.

Is There Some Growth For Barloworld?

Barloworld's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings growth, the company posted a terrific increase of 74%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 3.2% per annum during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 11% per year, which is noticeably more attractive.

With this information, we find it interesting that Barloworld is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Barloworld's P/E is also back up to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Barloworld currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Barloworld (at least 1 which can't be ignored), and understanding them should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.