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When close to half the companies in New Zealand have price-to-earnings ratios (or "P/E's") below 18x, you may consider Foley Wines Limited (NZSE:FWL) as a stock to potentially avoid with its 24.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Earnings have risen firmly for Foley Wines recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Where Does Foley Wines' P/E Sit Within Its Industry?
It's plausible that Foley Wines' high P/E ratio could be a result of tendencies within its own industry. You'll notice in the figure below that P/E ratios in the Beverage industry are also higher than the market. So it appears the company's ratio could be influenced considerably by these industry numbers currently. In the context of the Beverage industry's current setting, most of its constituents' P/E's would be expected to be raised up. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Foley Wines will help you shine a light on its historical performance.
Is There Enough Growth For Foley Wines?
There's an inherent assumption that a company should outperform the market for P/E ratios like Foley Wines' to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. EPS has also lifted 21% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 7.8% shows it's a great look while it lasts.
With this information, we can see why Foley Wines is trading at a high P/E compared to the market. Investors are willing to pay more for a stock they hope will buck the trend of the broader market going backwards. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Foley Wines revealed its growing earnings over the medium-term are contributing to its high P/E, given the market is set to shrink. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. We still remain cautious about the company's ability to stay its recent course and swim against the current of 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.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Foley Wines (1 is significant!) that you need to be mindful of.
If you're unsure about the strength of Foley Wines' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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