Earnings Tell The Story For Stantec Inc. (TSE:STN)

Stantec Inc.'s (TSE:STN) price-to-earnings (or "P/E") ratio of 38.3x might make it look like a strong sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 15x and even P/E's below 7x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Stantec certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Stantec

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

How Is Stantec's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Stantec's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 75% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 20% per year over the next three years. That's shaping up to be materially higher than the 10% each year growth forecast for the broader market.

With this information, we can see why Stantec 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 Key Takeaway

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 Stantec 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.

Before you settle on your opinion, we've discovered 2 warning signs for Stantec that you should be aware of.

Of course, you might also be able to find a better stock than Stantec. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.