Ethan Allen Interiors Inc. (NYSE:ETH) Not Flying Under The Radar

When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 19x, you may consider Ethan Allen Interiors Inc. (NYSE:ETH) as a stock to avoid entirely with its 42.4x 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.

Recent times haven’t been advantageous for Ethan Allen Interiors as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.

See our latest analysis for Ethan Allen Interiors

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NYSE:ETH Price Based on Past Earnings August 31st 2020
Keen to find out how analysts think Ethan Allen Interiors’ future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Ethan Allen Interiors?

There’s an inherent assumption that a company should far outperform the market for P/E ratios like Ethan Allen Interiors’ to be considered reasonable.

If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 65%. As a result, earnings from three years ago have also fallen 74% 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 four analysts covering the company suggest earnings should grow by 61% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 13% per annum, which is noticeably less attractive.

With this information, we can see why Ethan Allen Interiors 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.

What We Can Learn From Ethan Allen Interiors’ P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.

As we suspected, our examination of Ethan Allen Interiors’ analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. 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 3 warning signs with Ethan Allen Interiors, and understanding them should be part of your investment process.

It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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This article by Simply Wall St is general in nature. 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.
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