Shareholders Should Be Pleased With ESCO Technologies Inc.'s (NYSE:ESE) Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider ESCO Technologies Inc. (NYSE:ESE) as a stock to avoid entirely with its 27.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, ESCO 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 ESCO Technologies

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

How Is ESCO Technologies' Growth Trending?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.1% last year. Pleasingly, EPS has also lifted 276% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 19% during the coming year according to the three analysts following the company. That's shaping up to be materially higher than the 12% growth forecast for the broader market.

In light of this, it's understandable that ESCO Technologies' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On ESCO Technologies' P/E

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 ESCO Technologies' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for ESCO Technologies with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on ESCO Technologies, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.