When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider PTC Inc. (NASDAQ:PTC) as a stock to avoid entirely with its 73.4x 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.
PTC has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for PTC
How Is PTC's Growth Trending?
In order to justify its P/E ratio, PTC would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a frustrating 9.9% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 27% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.
Looking ahead now, EPS is anticipated to climb by 30% each year during the coming three years according to the analysts following the company. With the market only predicted to deliver 10% per year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that PTC's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
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 PTC maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you take the next step, you should know about the 2 warning signs for PTC that we have uncovered.
If you're unsure about the strength of PTC's 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.
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About NasdaqGS:PTC
PTC
Operates as software company in the Americas, Europe, and the Asia Pacific.
High growth potential and slightly overvalued.
