PWR Holdings Limited (ASX:PWH) Stocks Shoot Up 25% But Its P/E Still Looks Reasonable

The PWR Holdings Limited (ASX:PWH) share price has done very well over the last month, posting an excellent gain of 25%. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.

Since its price has surged higher, PWR Holdings may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 53.8x, since almost half of all companies in Australia have P/E ratios under 19x and even P/E's lower than 9x are not unusual. 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.

With earnings growth that's superior to most other companies of late, PWR Holdings has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for PWR Holdings

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Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like PWR Holdings' to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 12%. The latest three year period has also seen an excellent 46% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 21% each year during the coming three years according to the eight analysts following the company. With the market only predicted to deliver 16% each year, the company is positioned for a stronger earnings result.

With this information, we can see why PWR 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 Final Word

The strong share price surge has got PWR Holdings' P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that PWR 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.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for PWR Holdings with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on PWR Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.