When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Topgolf Callaway Brands Corp. (NYSE:MODG) as a stock to avoid entirely with its 26x 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, Topgolf Callaway Brands 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.  If not, then existing shareholders may be very nervous about the viability of the share price.    

See our latest analysis for Topgolf Callaway Brands

NYSE:MODG Price to Earnings Ratio vs Industry December 18th 2023

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Topgolf Callaway Brands.

How Is Topgolf Callaway Brands' Growth Trending?  

There's an inherent assumption that a company should far outperform the market for P/E ratios like Topgolf Callaway Brands' to be considered reasonable.  

Retrospectively, the last year delivered a frustrating 51% decrease to the company's bottom line.   Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time.  So it appears to us that the company has had a mixed result in terms of growing earnings over that time.  

Looking ahead now, EPS is anticipated to slump, contracting by 23% during the coming year according to the analysts following the company.  With the market predicted to deliver 10% growth , that's a disappointing outcome.

In light of this, it's alarming that Topgolf Callaway Brands' P/E sits above the majority of other companies.  Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price.  There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.  

The Bottom Line On Topgolf Callaway Brands' 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.

Our examination of Topgolf Callaway Brands' analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted.  When we see a poor outlook with earnings heading backwards, 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 3 warning signs for Topgolf Callaway Brands (1 doesn't sit too well with us!) that you need to be mindful of.  

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.  

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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.