The Price Is Right For WPP plc (LON:WPP)

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 16x, you may consider WPP plc (LON:WPP) as a stock to avoid entirely with its 45.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

WPP could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for WPP

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

Is There Enough Growth For WPP?

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

Retrospectively, the last year delivered a frustrating 62% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 53% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 58% per annum as estimated by the twelve analysts watching the company. With the market only predicted to deliver 13% each year, the company is positioned for a stronger earnings result.

With this information, we can see why WPP 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.

What We Can Learn From WPP's P/E?

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 WPP 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. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware WPP is showing 3 warning signs in our investment analysis, and 1 of those is potentially serious.

If these risks are making you reconsider your opinion on WPP, 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.