When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Mettler-Toledo International Inc. (NYSE:MTD) as a stock to avoid entirely with its 35.8x 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.
With earnings that are retreating more than the market's of late, Mettler-Toledo International has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
How Is Mettler-Toledo International's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as Mettler-Toledo International's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 6.9% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 46% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next three years should generate growth of 11% per year as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 10% per year, which is not materially different.
With this information, we find it interesting that Mettler-Toledo International is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
What We Can Learn From Mettler-Toledo International's P/E?
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 Mettler-Toledo International currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Mettler-Toledo International that you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.