When nearly half of the companies in the United States have a price-to-earnings (P/E) ratio of less than 17x, you may consider PriceSmart, Inc. (NASDAQ:PSMT) is a stock that may be worth avoiding with its P/E ratio of 20.9. However, it is not wise to simply take the P/E ratio at face value as there may be an explanation as to why it is so high.
PriceSmart has certainly done well recently, as earnings growth has been positive while most other companies’ earnings have been declining. It seems that many expect the company to continue to defy general market adversities, which has increased investors’ willingness to pay more for the stock. If not, existing shareholders may be a little nervous about the viability of the share price.
Check out our latest analysis for PriceSmart
If you want to know what analysts are predicting for the future, you should check out our free Report on PriceSmart.
What do growth metrics tell us about the high P/E ratio?
PriceSmart’s P/E ratio would be typical of a company expected to deliver solid growth and, more importantly, outperform the market.
Looking back, last year saw a decent 8.9% increase in earnings for the company. Over the last three years, earnings per share have risen by 28% overall, partly due to short-term performance. Accordingly, shareholders would probably have been happy with medium-term earnings growth rates.
According to the three analysts who cover the company, earnings per share are expected to grow 16% in the coming year. The rest of the market is forecast to grow 15%, which is not much different.
Given this information, we find it interesting that PriceSmart is trading at a high P/E compared to the market. It seems that many investors in the company are more optimistic than analysts indicate and are not willing to offload their shares at this time. However, additional gains will be difficult to achieve as this earnings growth will likely weigh on the share price eventually.
The conclusion on PriceSmart’s P/E ratio
It’s not a good idea to use the price-to-earnings ratio alone to decide whether to sell your stock, but it can be a useful guide to the company’s future prospects.
Our study of PriceSmart’s analyst forecasts found that the market-based earnings outlook does not drive the high P/E as much as we would have expected. At the moment, we are unhappy with the relatively high share price, as the forecast future earnings are unlikely to sustain such positive sentiment for long. Unless these conditions improve, it is difficult to accept these prices as reasonable.
It is also worth noting that we found 1 warning signal for PriceSmart that you need to take into account.
Naturally, You may also be able to find a better stock than PriceSmart. You may want to see this free Collection of other companies that have reasonable P/E ratios and strong earnings growth.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
