Darden Restaurants, Inc.'s (NYSE:DRI) P/E Still Appears To Be Reasonable

There wouldn't be many who think Darden Restaurants, Inc.'s (NYSE:DRI) price-to-earnings (or "P/E") ratio of 18x is worth a mention when the median P/E in the United States is similar at about 17x. 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 Darden Restaurants as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. 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 Darden Restaurants

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

Is There Some Growth For Darden Restaurants?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 11% last year. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 10% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 11% per annum, which is not materially different.

In light of this, it's understandable that Darden Restaurants' P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

What We Can Learn From Darden Restaurants' 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.

As we suspected, our examination of Darden Restaurants' analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Darden Restaurants that you need to be mindful of.

If these risks are making you reconsider your opinion on Darden Restaurants, 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.