When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Atour Lifestyle Holdings Limited (NASDAQ:ATAT) as a stock to potentially avoid with its 22.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Atour Lifestyle Holdings as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Atour Lifestyle Holdings' Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Atour Lifestyle Holdings' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 159% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 407% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 29% during the coming year according to the analysts following the company. That's shaping up to be materially higher than the 15% growth forecast for the broader market.

With this information, we can see why Atour Lifestyle Holdings 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 Key Takeaway

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.

We've established that Atour Lifestyle Holdings 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. You can assess many of the main risks through our free balance sheet analysis for Atour Lifestyle Holdings with six simple checks.

You might be able to find a better investment than Atour Lifestyle Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.