Collins Foods Limited (ASX:CKF) Not Flying Under The Radar

Collins Foods Limited's (ASX:CKF) price-to-earnings (or "P/E") ratio of 44.6x might make it look like a strong sell right now compared to the market in Australia, where around half of the companies have P/E ratios below 19x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times haven't been advantageous for Collins Foods as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Collins Foods

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Collins Foods.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Collins Foods would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 8.6% in total over the last three years. 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 48% each year during the coming three years according to the twelve analysts following the company. With the market only predicted to deliver 17% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Collins Foods' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Collins Foods' 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Collins Foods you should be aware of, and 1 of them is potentially serious.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.