When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider The Toro Company (NYSE:TTC) as a stock to avoid entirely with its 35.3x P/E ratio. 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, Toro 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.
NYSE:TTC Price to Earnings Ratio vs Industry August 7th 2024 If you'd like to see what analysts are forecasting going forward, you should check out our free report on Toro.
How Is Toro's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as Toro's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 48%. This means it has also seen a slide in earnings over the longer-term as EPS is down 34% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 26% each year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 10% each year, which is noticeably less attractive.
With this information, we can see why Toro is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
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.
We've established that Toro 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.
Plus, you should also learn about these 3 warning signs we've spotted with Toro.
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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