With TC Energy Corporation (TSE:TRP) It Looks Like You'll Get What You Pay For

TC Energy Corporation's (TSE:TRP) price-to-earnings (or "P/E") ratio of 20.4x might make it look like a sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 14x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

TC Energy 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. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for TC Energy

Want the full picture on analyst estimates for the company? Then our free report on TC Energy will help you uncover what's on the horizon.

How Is TC Energy's Growth Trending?

In order to justify its P/E ratio, TC Energy would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 66%. As a result, it also grew EPS by 9.8% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 26% each year as estimated by the analysts watching the company. With the market only predicted to deliver 8.0% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why TC Energy is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that TC Energy maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for TC Energy (2 make us uncomfortable!) that you should be aware of before investing here.

You might be able to find a better investment than TC Energy. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.