With Grocery Outlet Holding Corp. (NASDAQ:GO) It Looks Like You'll Get What You Pay For

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Grocery Outlet Holding Corp. (NASDAQ:GO) as a stock to avoid entirely with its 29.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Grocery Outlet Holding has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Grocery Outlet Holding's Growth Trending?

Grocery Outlet Holding's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.5%. This means it has also seen a slide in earnings over the longer-term as EPS is down 47% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 10% per year growth forecast for the broader market.

With this information, we can see why Grocery Outlet 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 Grocery Outlet 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.

We've established that Grocery Outlet Holding 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Grocery Outlet Holding with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Grocery Outlet Holding, 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.

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