Unpleasant Surprises Could Be In Store For Boxer Retail Limited's (JSE:BOX) Shares

When close to half the companies in South Africa have price-to-earnings ratios (or "P/E's") below 8x, you may consider Boxer Retail Limited (JSE:BOX) as a stock to avoid entirely with its 21.6x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Boxer Retail could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Boxer Retail

Keen to find out how analysts think Boxer Retail's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered a frustrating 42% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 88% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 0.8% each year during the coming three years according to the six analysts following the company. That's not great when the rest of the market is expected to grow by 15% each year.

With this information, we find it concerning that Boxer Retail is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Boxer Retail currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Boxer Retail with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.