With Verra Mobility Corporation (NASDAQ:VRRM) It Looks Like You'll Get What You Pay For
When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 14x, you may consider Verra Mobility Corporation (NASDAQ:VRRM) as a stock to avoid entirely with its 27.8x 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.
Recent times have been advantageous for Verra Mobility as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Verra Mobility
Want the full picture on analyst estimates for the company? Then our free report on Verra Mobility will help you uncover what's on the horizon.
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 Verra Mobility's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 134% gain to the company's bottom line. The latest three year period has also seen an excellent 474% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 14% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.6% each year, which is noticeably less attractive.
In light of this, it's understandable that Verra Mobility'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
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.
As we suspected, our examination of Verra Mobility's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
It is also worth noting that we have found 1 warning sign for Verra Mobility that you need to take into consideration.
Of course, you might also be able to find a better stock than Verra Mobility. So you may wish to see this free collection of other companies that sit on P/E's below 20x 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.
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