Why We're Not Concerned About Booz Allen Hamilton Holding Corporation's (NYSE:BAH) Share Price

With a price-to-earnings (or "P/E") ratio of 33.9x Booz Allen Hamilton Holding Corporation (NYSE:BAH) 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 16x and even P/E's lower than 9x 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.

Booz Allen Hamilton Holding certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Booz Allen Hamilton Holding

Keen to find out how analysts think Booz Allen Hamilton Holding's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Booz Allen Hamilton Holding's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 126% gain to the company's bottom line. As a result, it also grew EPS by 5.6% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 14% per year as estimated by the twelve analysts watching the company. That's shaping up to be materially higher than the 10% per annum growth forecast for the broader market.

With this information, we can see why Booz Allen Hamilton Holding 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 Booz Allen Hamilton Holding's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Booz Allen Hamilton Holding'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.

Having said that, be aware Booz Allen Hamilton Holding is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Booz Allen Hamilton Holding's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com