Risks To Shareholder Returns Are Elevated At These Prices For Fox Factory Holding Corp. (NASDAQ:FOXF)

It's not a stretch to say that Fox Factory Holding Corp.'s (NASDAQ:FOXF) price-to-earnings (or "P/E") ratio of 16.9x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 17x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

While the market has experienced earnings growth lately, Fox Factory Holding's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Fox Factory Holding would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 94% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 2.8% during the coming year according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to expand by 10%, which is noticeably more attractive.

In light of this, it's curious that Fox Factory Holding's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Fox Factory Holding's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Fox Factory Holding currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Fox Factory Holding with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Fox Factory Holding's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.