When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 15x, you may consider Bioventix PLC (LON:BVXP) as a stock to avoid entirely with its 25.6x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Bioventix 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Bioventix?

In order to justify its P/E ratio, Bioventix would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a decent 9.0% gain to the company's bottom line. EPS has also lifted 15% 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 respectable for the company.

Looking ahead now, EPS is anticipated to climb by 3.8% during the coming year according to the only analyst following the company. With the market predicted to deliver 13% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Bioventix's P/E sits above the majority of other companies. 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 growth outlook.

The Final Word

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 Bioventix's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.