Bath & Body Works, Inc.'s (NYSE:BBWI) price-to-earnings (or "P/E") ratio of 8.5x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 18x and even P/E's above 32x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Our free stock report includes 3 warning signs investors should be aware of before investing in Bath & Body Works. Read for free now.While the market has experienced earnings growth lately, Bath & Body Works' earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
View our latest analysis for Bath & Body Works
Is There Any Growth For Bath & Body Works?
In order to justify its P/E ratio, Bath & Body Works would need to produce anemic growth that's substantially trailing the market.
Retrospectively, the last year delivered a frustrating 5.5% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 6.3% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next three years should generate growth of 5.3% each year as estimated by the analysts watching the company. With the market predicted to deliver 10% growth each year, the company is positioned for a weaker earnings result.
In light of this, it's understandable that Bath & Body Works' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
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.
We've established that Bath & Body Works maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
You should always think about risks. Case in point, we've spotted 3 warning signs for Bath & Body Works you should be aware of, and 1 of them is significant.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.