IDP Education Limited (ASX:IEL) as a stock to avoid entirely with its 70.5x 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.” data-reactid=”28″>When close to half the companies in Australia have price-to-earnings ratios (or “P/E’s”) below 17x, you may consider IDP Education Limited (ASX:IEL) as a stock to avoid entirely with its 70.5x 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.
IDP Education’s negative earnings growth of late has neither been better nor worse than most other companies. It might be that many expect the company’s earnings to strengthen positively despite the tough market conditions, which has kept the P/E from falling. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
View our latest analysis for IDP Education ” data-reactid=”30″> View our latest analysis for IDP Education
free report on IDP Education will help you uncover what’s on the horizon.” data-reactid=”47″>Want the full picture on analyst estimates for the company? Then our free report on IDP Education will help you uncover what’s on the horizon.
Is There Enough Growth For IDP Education?
The only time you’d be truly comfortable seeing a P/E as steep as IDP Education’s is when the company’s growth is on track to outshine the market decidedly.
Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Although pleasingly EPS has lifted 58% in aggregate from three years ago, notwithstanding the last 12 months. 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 27% per year during the coming three years according to the seven analysts following the company. That’s shaping up to be materially higher than the 13% each year growth forecast for the broader market.
With this information, we can see why IDP Education is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
The price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of IDP Education’s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.
2 warning signs for IDP Education that we have uncovered.” data-reactid=”56″>Before you take the next step, you should know about the 2 warning signs for IDP Education that we have uncovered.
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Get in touch with us directly. Alternatively, email firstname.lastname@example.org.” data-reactid=”58″>This article by Simply Wall St is general in nature. 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.
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