Subdued Growth No Barrier To Barrett Business Services, Inc.'s (NASDAQ:BBSI) Price

It's not a stretch to say that Barrett Business Services, Inc.'s (NASDAQ:BBSI) price-to-earnings (or "P/E") ratio of 17.1x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 19x. 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.

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Recent earnings growth for Barrett Business Services has been in line with the market. The P/E is probably moderate because investors think this modest earnings performance will continue. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

See our latest analysis for Barrett Business Services

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

How Is Barrett Business Services' Growth Trending?

In order to justify its P/E ratio, Barrett Business Services would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a decent 10.0% gain to the company's bottom line. Pleasingly, EPS has also lifted 34% in aggregate from three years ago, partly 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 8.3% during the coming year according to the four analysts following the company. Meanwhile, the rest of the market is forecast to expand by 16%, which is noticeably more attractive.

In light of this, it's curious that Barrett Business Services' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Barrett Business Services' P/E?

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 Barrett Business Services currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Barrett Business Services (including 1 which doesn't sit too well with us).

If these risks are making you reconsider your opinion on Barrett Business Services, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.