Pinning Down Washington H. Soul Pattinson and Company Limited's (ASX:SOL) P/E Is Difficult Right Now

With a price-to-earnings (or "P/E") ratio of 25x Washington H. Soul Pattinson and Company Limited (ASX:SOL) may be sending bearish signals at the moment, given that almost half of all companies in Australia have P/E ratios under 17x and even P/E's lower than 10x 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 as high as it is.

While the market has experienced earnings growth lately, Washington H. Soul Pattinson's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Washington H. Soul Pattinson

Keen to find out how analysts think Washington H. Soul Pattinson's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Washington H. Soul Pattinson?

There's an inherent assumption that a company should outperform the market for P/E ratios like Washington H. Soul Pattinson's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 29% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 29% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings growth is heading into negative territory, declining 8.0% each year over the next three years. That's not great when the rest of the market is expected to grow by 15% each year.

In light of this, it's alarming that Washington H. Soul Pattinson's P/E sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Bottom Line On Washington H. Soul Pattinson's 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.

We've established that Washington H. Soul Pattinson currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Washington H. Soul Pattinson (1 doesn't sit too well with us!) that you need to be mindful of.

If you're unsure about the strength of Washington H. Soul Pattinson's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.