With a price-to-earnings (or "P/E") ratio of 29.7x The Gorman-Rupp Company (NYSE:GRC) 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 19x and even P/E's lower than 11x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Gorman-Rupp certainly has been doing a good job lately as it's been growing earnings more 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 Gorman-Rupp
Is There Enough Growth For Gorman-Rupp?
In order to justify its P/E ratio, Gorman-Rupp would need to produce outstanding growth well in excess of the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 34% last year. The latest three year period has also seen a 26% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 29% during the coming year according to the dual analysts following the company. That's shaping up to be materially higher than the 15% growth forecast for the broader market.
In light of this, it's understandable that Gorman-Rupp's 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 Gorman-Rupp's P/E
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.
As we suspected, our examination of Gorman-Rupp'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.
It is also worth noting that we have found 1 warning sign for Gorman-Rupp 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.
About NYSE:GRC
Gorman-Rupp
Designs, manufactures, and sells pumps and pump systems in the United States and internationally.
Established dividend payer with proven track record.
