When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider American Water Works Company, Inc. (NYSE:AWK) as a stock to avoid entirely with its 28.2x 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.  

Recent times haven't been advantageous for American Water Works Company as its earnings have been falling quicker 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.    

See our latest analysis for American Water Works Company

NYSE:AWK Price to Earnings Ratio vs Industry January 9th 2024

If you'd like to see what analysts are forecasting going forward, you should check out our free report on American Water Works Company.

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

The only time you'd be truly comfortable seeing a P/E as steep as American Water Works Company's is when the company's growth is on track to outshine the market decidedly.  

Retrospectively, the last year delivered a frustrating 33% decrease to the company's bottom line.   Regardless, EPS has managed to lift by a handy 29% in aggregate from three years ago, thanks to the earlier period of growth.  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.  

Turning to the outlook, the next three years should generate growth of 6.9%  per year as estimated by the twelve analysts watching the company.  With the market predicted to deliver 12% growth  each year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that American Water Works Company's P/E sits above the majority of other companies.  Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price.  There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.  

The Final Word

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.

Our examination of American Water Works Company's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted.  When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower.  This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.    

We don't want to rain on the parade too much, but we did also find 4 warning signs for American Water Works Company (1 is concerning!) that you need to be mindful of.  

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

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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.