Unpleasant Surprises Could Be In Store For Darden Restaurants, Inc.'s (NYSE:DRI) Shares

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Darden Restaurants, Inc. (NYSE:DRI) as a stock to potentially avoid with its 21.9x 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.

We've discovered 3 warning signs about Darden Restaurants. View them for free.

Recent earnings growth for Darden Restaurants has been in line with the market. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Darden Restaurants

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

Is There Enough Growth For Darden Restaurants?

In order to justify its P/E ratio, Darden Restaurants would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.0% last year. EPS has also lifted 12% 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 actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 12% per annum over the next three years. That's shaping up to be similar to the 10% per annum growth forecast for the broader market.

In light of this, it's curious that Darden Restaurants' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Darden Restaurants' P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Darden Restaurants currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Darden Restaurants, and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.