Twin Disc, Incorporated's (NASDAQ:TWIN) 29% Jump Shows Its Popularity With Investors

Twin Disc, Incorporated (NASDAQ:TWIN) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 22% over that time.

Since its price has surged higher, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Twin Disc as a stock to avoid entirely with its 30.9x 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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Twin Disc hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Twin Disc

Keen to find out how analysts think Twin Disc's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Twin Disc?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 61%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 183% during the coming year according to the only analyst following the company. With the market only predicted to deliver 13%, the company is positioned for a stronger earnings result.

With this information, we can see why Twin Disc 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 Bottom Line On Twin Disc's P/E

Twin Disc's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Twin Disc's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Twin Disc that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.