Urban Outfitters, Inc.'s (NASDAQ:URBN) Share Price Is Matching Sentiment Around Its Earnings

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Urban Outfitters, Inc. (NASDAQ:URBN) as an attractive investment with its 11.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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With earnings growth that's superior to most other companies of late, Urban Outfitters has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Is There Any Growth For Urban Outfitters?

In order to justify its P/E ratio, Urban Outfitters would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 40% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 37% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 3.9% per year over the next three years. With the market predicted to deliver 11% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Urban Outfitters is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Urban Outfitters' 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.

We've established that Urban Outfitters maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Urban Outfitters that you should be aware of.

You might be able to find a better investment than Urban Outfitters. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.