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When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 16x, you may consider Baby Bunting Group Limited (ASX:BBN) as a stock to avoid entirely with its 52.9x 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.
While the market has experienced earnings growth lately, Baby Bunting Group's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
See our latest analysis for Baby Bunting Group
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Baby Bunting Group.
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Baby Bunting Group would need to produce outstanding growth well in excess of the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 15%. As a result, earnings from three years ago have also fallen 19% overall. 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 46% per year during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 13% per year growth forecast for the broader market.
In light of this, it's understandable that Baby Bunting Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Baby Bunting Group's P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Baby Bunting Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
Having said that, be aware Baby Bunting Group is showing 3 warning signs in our investment analysis, you should know about.