Subdued Growth No Barrier To The Simply Good Foods Company's (NASDAQ:SMPL) Price

With a price-to-earnings (or "P/E") ratio of 23.6x The Simply Good Foods Company (NASDAQ:SMPL) 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 9x are not unusual. 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Simply Good Foods has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Simply Good Foods

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

Is There Enough Growth For Simply Good Foods?

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

Retrospectively, the last year delivered a decent 8.1% gain to the company's bottom line. The latest three year period has also seen an excellent 426% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 12% per year over the next three years. That's shaping up to be similar to the 11% per annum growth forecast for the broader market.

With this information, we find it interesting that Simply Good Foods is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Simply Good Foods' P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Simply Good Foods' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Simply Good Foods with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Simply Good Foods. 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.