Getting In Cheap On ESAB Corporation (NYSE:ESAB) Might Be Difficult

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider ESAB Corporation (NYSE:ESAB) as a stock to avoid entirely with its 30.2x 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 earnings that are retreating more than the market's of late, ESAB has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for ESAB

Want the full picture on analyst estimates for the company? Then our free report on ESAB will help you uncover what's on the horizon.

Is There Enough Growth For ESAB?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.3%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 37% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 16% each year over the next three years. That's shaping up to be materially higher than the 10% per year growth forecast for the broader market.

In light of this, it's understandable that ESAB's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

We've established that ESAB 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.

It is also worth noting that we have found 2 warning signs for ESAB that you need to take into consideration.

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.