What You Can Learn From BT Group plc's (LON:BT.A) P/E

BT Group plc's (LON:BT.A) price-to-earnings (or "P/E") ratio of 18.8x might make it look like a sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 16x and even P/E's below 10x 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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Recent times have been advantageous for BT Group as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for BT Group

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

How Is BT Group's Growth Trending?

In order to justify its P/E ratio, BT Group would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. Still, incredibly EPS has fallen 45% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 18% per annum over the next three years. With the market only predicted to deliver 15% per year, the company is positioned for a stronger earnings result.

With this information, we can see why BT Group is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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.

As we suspected, our examination of BT Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for BT Group that you should be aware of.

Of course, you might also be able to find a better stock than BT Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.