Why We're Not Concerned About Stantec Inc.'s (TSE:STN) Share Price

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 16x, you may consider Stantec Inc. (TSE:STN) as a stock to avoid entirely with its 40x 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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Stantec certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out 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.

Does Growth Match The High P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 30% last year. The strong recent performance means it was also able to grow EPS by 121% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 17% each year as estimated by the eleven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 12% per year, which is noticeably less attractive.

In light of this, it's understandable that Stantec's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Stantec's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Stantec'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.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Stantec with six simple checks.

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.