Medpace Holdings, Inc.'s (NASDAQ:MEDP) Price Is Out Of Tune With Earnings

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Medpace Holdings, Inc. (NASDAQ:MEDP) as a stock to avoid entirely with its 29.7x 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 so lofty.

Medpace Holdings 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Medpace Holdings

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

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Medpace Holdings would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 34%. Pleasingly, EPS has also lifted 132% 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.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 9.7% per annum 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 curious that Medpace Holdings' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Medpace Holdings' 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Medpace Holdings with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Medpace Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.