There wouldn't be many who think Barings BDC, Inc.'s (NYSE:BBDC) price-to-earnings (or "P/E") ratio of 13.7x is worth a mention when the median P/E in the United States is similar at about 15x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Barings BDC could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
Keen to find out how analysts think Barings BDC's future stacks up against the industry? In that case, our free report is a great place to start.
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like Barings BDC's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a frustrating 60% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 10% as estimated by the seven analysts watching the company. That's not great when the rest of the market is expected to grow by 10%.
With this information, we find it concerning that Barings BDC is trading at a fairly similar P/E to 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 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 Final Word
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Barings BDC currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Barings BDC (at least 2 which don't sit too well with us), and understanding these should be part of your investment process.
If you're unsure about the strength of Barings BDC's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.