When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Axalta Coating Systems Ltd. (NYSE:AXTA) as a stock to avoid entirely with its 26.2x P/E ratio.  Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.  

Axalta Coating Systems certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards.   It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock.  You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.    

NYSE:AXTA Price to Earnings Ratio vs Industry April 18th 2024

Keen to find out how analysts think Axalta Coating Systems' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?  

There's an inherent assumption that a company should far outperform the market for P/E ratios like Axalta Coating Systems' to be considered reasonable.  

Retrospectively, the last year delivered an exceptional 40% gain to the company's bottom line.   The latest three year period has also seen an excellent 135% overall rise in EPS, aided by its short-term performance.  So we can start by confirming that the company has done a great job of growing earnings over that time.  

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 20% each year over the next three years.  Meanwhile, the rest of the market is forecast to only expand by 10% per year, which is noticeably less attractive.

In light of this, it's understandable that Axalta Coating Systems' 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 Axalta Coating Systems' 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 Axalta Coating Systems 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.    

We don't want to rain on the parade too much, but we did also find 1 warning sign for Axalta Coating Systems that you need to be mindful of.  

Of course, you might also be able to find a better stock than Axalta Coating Systems. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.