Subdued Growth No Barrier To Yum! Brands, Inc.'s (NYSE:YUM) Price

With a price-to-earnings (or "P/E") ratio of 24.1x Yum! Brands, Inc. (NYSE:YUM) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 8x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Yum! Brands as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Yum! Brands

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

How Is Yum! Brands' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Yum! Brands' is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. Pleasingly, EPS has also lifted 53% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 12% per annum as estimated by the analysts watching the company. With the market predicted to deliver 13% growth per year, the company is positioned for a comparable earnings result.

In light of this, it's curious that Yum! Brands' 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 Yum! Brands' 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.

We've established that Yum! Brands currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Yum! Brands is showing 4 warning signs in our investment analysis, and 2 of those are concerning.

Of course, you might also be able to find a better stock than Yum! Brands. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.