Investors Appear Satisfied With Patrick Industries, Inc.'s (NASDAQ:PATK) Prospects

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Patrick Industries, Inc. (NASDAQ:PATK) as a stock to avoid entirely with its 29.5x 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.

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Patrick Industries hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

See our latest analysis for Patrick Industries

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

In order to justify its P/E ratio, Patrick Industries would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 63% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 21% as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 15%, which is noticeably less attractive.

In light of this, it's understandable that Patrick Industries' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Patrick Industries' 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 Patrick Industries 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.

Having said that, be aware Patrick Industries is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Patrick Industries. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.