Cashbuild Limited's (JSE:CSB) Share Price Could Signal Some Risk

Cashbuild Limited's (JSE:CSB) price-to-earnings (or "P/E") ratio of 11.9x 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. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Cashbuild certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Cashbuild

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

How Is Cashbuild's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 165% gain to the company's bottom line. Still, incredibly EPS has fallen 50% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 15% per year during the coming three years according to the only analyst following the company. Meanwhile, the rest of the market is forecast to expand by 16% each year, which is not materially different.

With this information, we find it interesting that Cashbuild is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Cashbuild's 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.

Our examination of Cashbuild's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 1 warning sign for Cashbuild that you should be aware of.

You might be able to find a better investment than Cashbuild. 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.