Pinnacle West Capital Corporation's (NYSE:PNW) Business Is Yet to Catch Up With Its Share Price

There wouldn't be many who think Pinnacle West Capital Corporation's (NYSE:PNW) price-to-earnings (or "P/E") ratio of 17.9x is worth a mention when the median P/E in the United States is similar at about 18x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Pinnacle West Capital has been doing quite well of late. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. 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 Pinnacle West Capital

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Is There Some Growth For Pinnacle West Capital?

There's an inherent assumption that a company should be matching the market for P/E ratios like Pinnacle West Capital's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 12% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 6.9% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 5.5% each year during the coming three years according to the nine analysts following the company. That's shaping up to be materially lower than the 10% each year growth forecast for the broader market.

In light of this, it's curious that Pinnacle West Capital's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Pinnacle West Capital's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Pinnacle West Capital currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Pinnacle West Capital (1 is concerning!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Pinnacle West Capital. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com