Getting In Cheap On Spin Master Corp. (TSE:TOY) Might Be Difficult

Explore Spin Master's Fair Values from the Community and select yours

When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 15x, you may consider Spin Master Corp. (TSE:TOY) as a stock to potentially avoid with its 18.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Spin Master certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Spin Master

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

Does Growth Match The High P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 98% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 69% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 31% each year during the coming three years according to the nine analysts following the company. With the market only predicted to deliver 9.9% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Spin Master'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.

What We Can Learn From Spin Master's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Spin Master's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Spin Master, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Spin Master, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.