It's not a stretch to say that Ralph Lauren Corporation's (NYSE:RL) price-to-earnings (or "P/E") ratio of 17.6x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 16x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Recent times have been pleasing for Ralph Lauren as its earnings have risen in spite of the market's earnings going into reverse. 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.
Check out our latest analysis for Ralph Lauren
How Is Ralph Lauren's Growth Trending?
The only time you'd be comfortable seeing a P/E like Ralph Lauren's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 14% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 11% per annum, which is noticeably less attractive.
In light of this, it's curious that Ralph Lauren's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.
What We Can Learn From Ralph Lauren's P/E?
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Ralph Lauren's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
You should always think about risks. Case in point, we've spotted 1 warning sign for Ralph Lauren you should be aware 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.
About NYSE:RL
Ralph Lauren
Designs, markets, and distributes lifestyle products in North America, Europe, Asia, and internationally.
Outstanding track record with excellent balance sheet and pays a dividend.
