Urban Outfitters, Inc. (NASDAQ:URBN) Could Be Riskier Than It Looks

With a price-to-earnings (or "P/E") ratio of 10.9x Urban Outfitters, Inc. (NASDAQ:URBN) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 35x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Urban Outfitters certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Urban Outfitters

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

Is There Any Growth For Urban Outfitters?

There's an inherent assumption that a company should underperform the market for P/E ratios like Urban Outfitters' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 37% gain to the company's bottom line. EPS has also lifted 15% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 9.1% each year during the coming three years according to the analysts following the company. 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 peculiar that Urban Outfitters' P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From Urban Outfitters' P/E?

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.

We've established that Urban Outfitters currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Urban Outfitters that you need to be mindful of.

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.