The Bidvest Group Limited's (JSE:BVT) Popularity With Investors Is Under Threat From Overpricing

The Bidvest Group Limited's (JSE:BVT) price-to-earnings (or "P/E") ratio of 12.9x might make it look like a sell right now compared to the market in South Africa, where around half of the companies have P/E ratios below 9x and even P/E's below 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Bidvest Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Bidvest Group

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How Is Bidvest Group's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Bidvest Group's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 4.2% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 16% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 12% each year over the next three years. That's shaping up to be materially lower than the 16% each year growth forecast for the broader market.

In light of this, it's alarming that Bidvest 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Bidvest Group's 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.

Our examination of Bidvest 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. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Bidvest Group you should know about.

If you're unsure about the strength of Bidvest Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.