Cautious Investors Not Rewarding Helen of Troy Limited's (NASDAQ:HELE) Performance Completely

With a median price-to-earnings (or "P/E") ratio of close to 16x in the United States, you could be forgiven for feeling indifferent about Helen of Troy Limited's (NASDAQ:HELE) P/E ratio of 18.1x. 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Helen of Troy has been doing quite well of late. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Helen of Troy's to be considered reasonable.

Retrospectively, the last year delivered a decent 10% gain to the company's bottom line. Still, lamentably EPS has fallen 25% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 17% over the next year. Meanwhile, the rest of the market is forecast to only expand by 12%, which is noticeably less attractive.

With this information, we find it interesting that Helen of Troy is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

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.

Our examination of Helen of Troy's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

You always need to take note of risks, for example - Helen of Troy has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Helen of Troy, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.