When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Tetra Tech, Inc. (NASDAQ:TTEK) as a stock to avoid entirely with its 31.8x 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 so lofty.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Tetra Tech has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
View our latest analysis for Tetra Tech
How Is Tetra Tech's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as Tetra Tech's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings growth, the company posted a worthy increase of 4.7%. Pleasingly, EPS has also lifted 60% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 17% over the next year. Meanwhile, the rest of the market is forecast to only expand by 10%, which is noticeably less attractive.
In light of this, it's understandable that Tetra Tech's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
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.
As we suspected, our examination of Tetra Tech's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
Having said that, be aware Tetra Tech is showing 2 warning signs in our investment analysis, you should know about.
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.