Getting In Cheap On Mattel, Inc. (NASDAQ:MAT) Might Be Difficult

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Mattel, Inc. (NASDAQ:MAT) as a stock to potentially avoid with its 20.5x 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 as high as it is.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Mattel has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Mattel

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

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. Pleasingly, EPS has also lifted 36% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 28% per annum during the coming three years according to the analysts following the company. With the market only predicted to deliver 10.0% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Mattel is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Mattel'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.

We've established that Mattel maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Mattel that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.