Pinning Down Advanced Drainage Systems, Inc.'s (NYSE:WMS) P/E Is Difficult Right Now

There wouldn't be many who think Advanced Drainage Systems, Inc.'s (NYSE:WMS) price-to-earnings (or "P/E") ratio of 18.1x is worth a mention when the median P/E in the United States is similar at about 18x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been advantageous for Advanced Drainage Systems as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Advanced Drainage Systems

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

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Advanced Drainage Systems' is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a decent 6.3% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 139% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 7.3% per annum as estimated by the seven analysts watching the company. That's shaping up to be materially lower than the 11% per year growth forecast for the broader market.

In light of this, it's curious that Advanced Drainage Systems' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Advanced Drainage Systems' 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.

Our examination of Advanced Drainage Systems' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for Advanced Drainage Systems 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.