Earnings Tell The Story For Verra Mobility Corporation (NASDAQ:VRRM)

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Verra Mobility Corporation (NASDAQ:VRRM) as a stock to avoid entirely with its 47.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

There hasn't been much to differentiate Verra Mobility's and the market's retreating earnings lately. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Verra Mobility

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

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

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

Retrospectively, the last year delivered a frustrating 1.3% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 326% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 32% each year during the coming three years according to the seven analysts following the company. That's shaping up to be materially higher than the 12% per annum growth forecast for the broader market.

With this information, we can see why Verra Mobility 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.

What We Can Learn From Verra Mobility's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Verra Mobility's 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.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Verra Mobility (of which 2 can't be ignored!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.