Some Confidence Is Lacking In Applied Industrial Technologies, Inc.'s (NYSE:AIT) P/E

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Applied Industrial Technologies, Inc. (NYSE:AIT) as a stock to potentially avoid with its 20.2x P/E ratio. However, the P/E might be 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, Applied Industrial Technologies 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Applied Industrial Technologies

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

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

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

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. Pleasingly, EPS has also lifted 226% 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.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 4.0% over the next year. With the market predicted to deliver 13% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that Applied Industrial Technologies is trading at a P/E higher than the market. 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. There's a good chance these shareholders are 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 Applied Industrial Technologies' P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Applied Industrial Technologies 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Applied Industrial Technologies with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.