When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Tempur Sealy International, Inc. (NYSE:TPX) as a stock to potentially avoid with its 25.2x 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 as high as it is.

Tempur Sealy International has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

How Is Tempur Sealy International's Growth Trending?

In order to justify its P/E ratio, Tempur Sealy International would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 10% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 19% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 16% per year as estimated by the ten analysts watching the company. That's shaping up to be materially higher than the 10% per annum growth forecast for the broader market.

In light of this, it's understandable that Tempur Sealy International's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Tempur Sealy International's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Tempur Sealy International 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.

Before you take the next step, you should know about the 1 warning sign for Tempur Sealy International that we have uncovered.

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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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.