Market Participants Recognise Transcat, Inc.'s (NASDAQ:TRNS) Earnings

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Transcat, Inc. (NASDAQ:TRNS) as a stock to avoid entirely with its 76.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Transcat has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Transcat

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

Is There Enough Growth For Transcat?

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

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. The latest three year period has also seen a 15% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 17% each year as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 10% each year growth forecast for the broader market.

With this information, we can see why Transcat 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.

The Key Takeaway

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 Transcat maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Transcat that you need to be mindful of.

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