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Espey Mfg. & Electronics Corp.'s (NYSEMKT:ESP) price-to-earnings (or "P/E") ratio of 32.2x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. 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.
For example, consider that Espey Mfg. & Electronics' financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
Where Does Espey Mfg. & Electronics' P/E Sit Within Its Industry?
We'd like to see if P/E's within Espey Mfg. & Electronics' industry might provide some colour around the company's particularly high P/E ratio. It turns out the Electrical industry in general has a P/E ratio similar to the market, as the graphic below shows. So unfortunately this doesn't provide a lot to explain the company's ratio right now. In the context of the Electrical industry's current setting, most of its constituents' P/E's would be expected to be held back. Nevertheless, the company's P/E should be primarily influenced by its own financial performance.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Espey Mfg. & Electronics' earnings, revenue and cash flow.
Does Growth Match The High P/E?
In order to justify its P/E ratio, Espey Mfg. & Electronics would need to produce outstanding growth well in excess of the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 30%. The last three years don't look nice either as the company has shrunk EPS by 21% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for a contraction of 11% shows the market is even less attractive on an annualised basis.
With this information, it might not be hard to see why Espey Mfg. & Electronics is trading at a higher P/E in comparison. Nonetheless, there's no guarantee the P/E has found a floor yet with recent earnings going backwards, despite the market heading down even harder. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.
What We Can Learn From Espey Mfg. & Electronics' P/E?
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Espey Mfg. & Electronics maintains its high P/E on the strength of its recentthree-year earnings not being as bad as the forecasts for a struggling market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under any additional threat. We still remain cautious about the company's ability to stay its recent course and resist the broader market turmoil. Although, if the company's relative performance doesn't change it will continue to provide strong support to the share price.
There are also other vital risk factors to consider and we've discovered 3 warning signs for Espey Mfg. & Electronics (1 shouldn't be ignored!) that you should be aware of before investing here.
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 P/E below 20x.
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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