Brinker International, Inc.'s (NYSE:EAT) Share Price Is Still Matching Investor Opinion Despite 26% Slump

The Brinker International, Inc. (NYSE:EAT) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. The good news is that in the last year, the stock has shone bright like a diamond, gaining 187%.

In spite of the heavy fall in price, given around half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may still consider Brinker International as a stock to potentially avoid with its 23.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Brinker International certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Brinker International

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Is There Enough Growth For Brinker International?

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

Retrospectively, the last year delivered an exceptional 70% gain to the company's bottom line. The latest three year period has also seen an excellent 81% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 20% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 11% each year growth forecast for the broader market.

With this information, we can see why Brinker International 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.

The Bottom Line On Brinker International's P/E

Despite the recent share price weakness, Brinker International's P/E remains higher than most other companies. 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.

As we suspected, our examination of Brinker International's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Brinker International, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Brinker International, 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.