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With a price-to-earnings (or "P/E") ratio of 39.6x Ritchie Bros. Auctioneers Incorporated (NYSE:RBA) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 10x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Ritchie Bros. Auctioneers certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
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Is There Enough Growth For Ritchie Bros. Auctioneers?
The only time you'd be truly comfortable seeing a P/E as steep as Ritchie Bros. Auctioneers' is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings growth, the company posted a terrific increase of 17%. Pleasingly, EPS has also lifted 196% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the ten analysts following the company. With the market predicted to deliver 13% growth per annum, the company is positioned for a comparable earnings result.
In light of this, it's curious that Ritchie Bros. Auctioneers' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
What We Can Learn From Ritchie Bros. Auctioneers' P/E?
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.
Our examination of Ritchie Bros. Auctioneers' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.