Why Investors Shouldn't Be Surprised By Equifax Inc.'s (NYSE:EFX) P/E

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Equifax Inc. (NYSE:EFX) as a stock to avoid entirely with its 57.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Equifax could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Equifax

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

How Is Equifax's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 27% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 9.3% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 38% per year over the next three years. With the market only predicted to deliver 13% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Equifax'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 Final Word

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 Equifax'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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Equifax that you should be aware of.

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.