With a price-to-earnings (or "P/E") ratio of 23.8x Smiths Group plc (LON:SMIN) may be sending bearish signals at the moment, given that almost half of all companies in the United Kingdom have P/E ratios under 15x and even P/E's lower than 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Smiths Group as its earnings have been rising faster 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 Smiths Group
How Is Smiths Group's Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like Smiths Group's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 13%. Pleasingly, EPS has also lifted 86% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 18% each year during the coming three years according to the eleven analysts following the company. With the market only predicted to deliver 15% per annum, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Smiths Group'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 Smiths Group's P/E?
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 Smiths Group 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.
You always need to take note of risks, for example - Smiths Group has 1 warning sign we think you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.
About LSE:SMIN
Smiths Group
Operates as an industrial technology company in Americas, Europe, the Asia Pacific, and internationally.
Flawless balance sheet with proven track record and pays a dividend.
