With Six Flags Entertainment Corporation (NYSE:SIX) It Looks Like You'll Get What You Pay For

Six Flags Entertainment Corporation's (NYSE:SIX) price-to-earnings (or "P/E") ratio of 25.6x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Six Flags Entertainment has been very sluggish. 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 Six Flags Entertainment

Want the full picture on analyst estimates for the company? Then our free report on Six Flags Entertainment will help you uncover what's on the horizon.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Six Flags Entertainment would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 10% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 80% during the coming year according to the analysts following the company. With the market only predicted to deliver 13%, the company is positioned for a stronger earnings result.

With this information, we can see why Six Flags Entertainment is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Six Flags Entertainment's 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.

As we suspected, our examination of Six Flags Entertainment's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Six Flags Entertainment has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Six Flags Entertainment, explore our interactive list of high quality stocks to get an idea of what else is out there.

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

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.