With a price-to-earnings (or “P/E”) ratio of 24.3x Ichor Holdings, Ltd. (NASDAQ:ICHR) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E’s lower than 10x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it’s justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Ichor Holdings has been doing quite well of late. 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.
See our latest analysis for Ichor Holdings
How Is Ichor Holdings’ Growth Trending?
Ichor Holdings’ P/E ratio would be typical for a company that’s expected to deliver solid growth, and importantly, perform better than the market.
Retrospectively, the last year delivered an exceptional 27% gain to the company’s bottom line. Despite this strong recent growth, it’s still struggling to catch up as its three-year EPS frustratingly shrank by 53% overall. 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 seven analysts covering the company suggest earnings should grow by 55% per annum over the next three years. That’s shaping up to be materially higher than the 13% per year growth forecast for the broader market.
With this information, we can see why Ichor Holdings 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 Key Takeaway
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 Ichor Holdings 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. It’s hard to see the share price falling strongly in the near future under these circumstances.
It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 5 warning signs with Ichor Holdings (at least 1 which can’t be ignored), and understanding them should be part of your investment process.
Of course, you might also be able to find a better stock than Ichor Holdings. So you may wish to see this free collection of other companies that sit on P/E’s below 20x and have grown earnings strongly.
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