With Flowserve Corporation (NYSE:FLS) It Looks Like You'll Get What You Pay For

With a price-to-earnings (or "P/E") ratio of 31.1x Flowserve Corporation (NYSE:FLS) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been advantageous for Flowserve as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Flowserve

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

How Is Flowserve's Growth Trending?

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

Retrospectively, the last year delivered a decent 8.8% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 61% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 37% as estimated by the eleven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 15%, which is noticeably less attractive.

With this information, we can see why Flowserve 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 Final Word

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 Flowserve 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.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Flowserve with six simple checks.

Of course, you might also be able to find a better stock than Flowserve. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.