XPEL, Inc. (NASDAQ:XPEL) May Have Run Too Fast Too Soon With Recent 31% Price Plummet

The XPEL, Inc. (NASDAQ:XPEL) share price has fared very poorly over the last month, falling by a substantial 31%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 46% share price drop.

Even after such a large drop in price, given around half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may still consider XPEL as a stock to potentially avoid with its 21.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, XPEL has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for XPEL

If you'd like to see what analysts are forecasting going forward, you should check out our free report on XPEL.

Is There Enough Growth For XPEL?

In order to justify its P/E ratio, XPEL would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.7% last year. Pleasingly, EPS has also lifted 104% 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.

Turning to the outlook, the next year should generate growth of 1.4% as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 13%, which is noticeably more attractive.

In light of this, it's alarming that XPEL's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

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

There's still some solid strength behind XPEL's P/E, if not its share price lately. 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 XPEL currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for XPEL you should be aware of.

If you're unsure about the strength of XPEL'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.