Washington H. Soul Pattinson and Company Limited's (ASX:SOL) Share Price Could Signal Some Risk

With a price-to-earnings (or "P/E") ratio of 24x 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 19x and even P/E's lower than 11x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Washington H. Soul Pattinson hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour 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 Washington H. Soul Pattinson

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How Is Washington H. Soul Pattinson's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Washington H. Soul Pattinson's is when the company's growth is on track to outshine the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 29%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 29% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings growth is heading into negative territory, declining 9.5% per annum over the next three years. Meanwhile, the broader market is forecast to expand by 19% per annum, which paints a poor picture.

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. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

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.

Our examination of Washington H. Soul Pattinson's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Washington H. Soul Pattinson (including 1 which is a bit concerning).

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.