When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Somnigroup International Inc. (NYSE:SGI) as a stock to avoid entirely with its 32.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Somnigroup International's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre 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.
View our latest analysis for Somnigroup International
Is There Enough Growth For Somnigroup International?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Somnigroup International's to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.6% last year. Still, lamentably EPS has fallen 42% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 23% per annum during the coming three years according to the ten analysts following the company. With the market only predicted to deliver 11% per year, the company is positioned for a stronger earnings result.
With this information, we can see why Somnigroup International is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Somnigroup International's P/E?
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 Somnigroup International maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.
Before you settle on your opinion, we've discovered 2 warning signs for Somnigroup International (1 makes us a bit uncomfortable!) that you should be aware of.
Of course, you might also be able to find a better stock than Somnigroup International. 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.