With Kerry Group plc (ISE:KRZ) It Looks Like You'll Get What You Pay For

Kerry Group plc's (ISE:KRZ) price-to-earnings (or "P/E") ratio of 19x might make it look like a sell right now compared to the market in Ireland, where around half of the companies have P/E ratios below 14x and even P/E's below 9x 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.

With earnings growth that's superior to most other companies of late, Kerry Group has been doing relatively well. 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 Kerry Group

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

Is There Enough Growth For Kerry Group?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. The strong recent performance means it was also able to grow EPS by 34% 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 10% per year as estimated by the twelve analysts watching the company. That's shaping up to be materially higher than the 7.7% per year growth forecast for the broader market.

In light of this, it's understandable that Kerry 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.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Kerry Group'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. Our free balance sheet analysis for Kerry Group with six simple checks will allow you to discover any risks that could be an issue.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.