There's No Escaping Bauba Resources Limited's (JSE:BAU) Muted Earnings

With a price-to-earnings (or "P/E") ratio of 4.1x Bauba Resources Limited (JSE:BAU) may be sending very bullish signals at the moment, given that almost half of all companies in South Africa have P/E ratios greater than 10x and even P/E's higher than 17x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Bauba Resources has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Bauba Resources

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Bauba Resources will help you shine a light on its historical performance.

How Is Bauba Resources' Growth Trending?

In order to justify its P/E ratio, Bauba Resources would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 117% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.5% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Bauba Resources is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Bauba Resources' P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Bauba Resources revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Bauba Resources is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

You might be able to find a better investment than Bauba Resources. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. 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.
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