With Xcel Energy Inc. (NASDAQ:XEL) It Looks Like You'll Get What You Pay For

There wouldn't be many who think Xcel Energy Inc.'s (NASDAQ:XEL) price-to-earnings (or "P/E") ratio of 20.2x is worth a mention when the median P/E in the United States is similar at about 19x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Xcel Energy certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Xcel Energy

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

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

In order to justify its P/E ratio, Xcel Energy would need to produce growth that's similar to the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.6% last year. The solid recent performance means it was also able to grow EPS by 12% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 9.0% each year as estimated by the analysts watching the company. With the market predicted to deliver 11% growth per year, the company is positioned for a comparable earnings result.

In light of this, it's understandable that Xcel Energy's P/E sits in line with the majority of other companies. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Bottom Line On Xcel Energy's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Xcel Energy maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Having said that, be aware Xcel Energy is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.