Getting In Cheap On National Tyre & Wheel Limited (ASX:NTD) Might Be Difficult

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 19x, you may consider National Tyre & Wheel Limited (ASX:NTD) as a stock to potentially avoid with its 26x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

National Tyre & Wheel has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for National Tyre & Wheel

If you'd like to see what analysts are forecasting going forward, you should check out our free report on National Tyre & Wheel.

Is There Enough Growth For National Tyre & Wheel?

National Tyre & Wheel's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 67% 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 44% 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.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 73% each year over the next three years. That's shaping up to be materially higher than the 17% each year growth forecast for the broader market.

In light of this, it's understandable that National Tyre & Wheel's 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

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.

As we suspected, our examination of National Tyre & Wheel's 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. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 3 warning signs we've spotted with National Tyre & Wheel (including 1 which is a bit concerning).

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.