When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Tradeweb Markets Inc. (NASDAQ:TW) as a stock to avoid entirely with its 64.2x 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.
Tradeweb Markets certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Tradeweb Markets would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 21%. Pleasingly, EPS has also lifted 79% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 16% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 11% per annum, the company is positioned for a stronger earnings result.
With this information, we can see why Tradeweb Markets 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
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Tradeweb Markets 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. Unless these conditions change, they will continue to provide strong support to the share price.
Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Tradeweb Markets with six simple checks will allow you to discover any risks that could be an issue.
If you're unsure about the strength of Tradeweb Markets' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
