Treasury Wine Estates Limited's (ASX:TWE) P/E Still Appears To Be Reasonable

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 17x, you may consider Treasury Wine Estates Limited (ASX:TWE) as a stock to avoid entirely with its 46.7x 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.

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Treasury Wine Estates 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. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Treasury Wine Estates

Keen to find out how analysts think Treasury Wine Estates' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Treasury Wine Estates' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 40% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 44% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 65% each year as estimated by the analysts watching the company. With the market only predicted to deliver 15% per year, the company is positioned for a stronger earnings result.

With this information, we can see why Treasury Wine Estates 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 Bottom Line On Treasury Wine Estates' P/E

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.

We've established that Treasury Wine Estates maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Treasury Wine Estates you should be aware of, and 1 of them doesn't sit too well with us.

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 low P/E).

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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.