What You Can Learn From Vertiv Holdings Co's (NYSE:VRT) P/E After Its 30% Share Price Crash

Vertiv Holdings Co (NYSE:VRT) shareholders that were waiting for something to happen have been dealt a blow with a 30% share price drop in the last month. Looking at the bigger picture, even after this poor month the stock is up 27% in the last year.

In spite of the heavy fall in price, Vertiv Holdings Co may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 65.3x, since almost half of all companies in the United States have P/E ratios under 17x and even P/E's lower than 10x 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.

Vertiv Holdings Co 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Vertiv Holdings Co

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

Does Growth Match The High P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.8% last year. This was backed up an excellent period prior to see EPS up by 287% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 53% each year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 11% each year growth forecast for the broader market.

With this information, we can see why Vertiv Holdings Co 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 Key Takeaway

A significant share price dive has done very little to deflate Vertiv Holdings Co's very lofty P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Vertiv Holdings Co 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.

You always need to take note of risks, for example - Vertiv Holdings Co has 2 warning signs we think you should be aware of.

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.