With a price / earnings (or “P / E”) ratio of 34.8x Republic Services, Inc. (NYSE: RSG) can send some very bearish signals right now, given that nearly half of all companies in the US have P / E ratios below 18x and even P / E below 10x are not unusual. However, the P / E can be quite high for a reason and requires further investigation to determine if it is warranted.
The recent times have not been good for Republic Services as their profits have grown more slowly than most other companies. One possibility is that the P / E is high because investors believe this poor earnings performance will improve dramatically. If not, existing shareholders may be very concerned about the viability of the share price.
NYSE price: RSG based on past profits on November 9, 2021
free report is a great place to start
Does growth match high P / E?
There is an inherent assumption that a company would have to far outperform the market for P / E ratios like Republic Services to be considered reasonable.
If we look back on the last year of earnings growth, the company posted a tremendous 19% increase. Yet incredibly, BPA has fallen 10% overall from three years ago, which is quite disappointing. So unfortunately we have to recognize that the company did not do a great job of increasing its profits during this period.
As for the outlook, next year is expected to generate 17% growth according to estimates from analysts watching the company. With the market forecast at only 11%, the company is positioned for a more solid profit result.
In light of this, it’s understandable that the P / E of Republic Services is above the majority of other companies. It appears that most investors expect this strong future growth and are prepared to pay more for the stock.
The key to take away
While the price-to-earnings ratio shouldn’t be the determining factor in whether or not you buy a stock, it is a fairly effective barometer of earnings expectations.
As we suspected, our review of Republic Services analysts’ forecasts revealed that its superior earnings outlook is contributing to its high P / E. Right now, shareholders are comfortable with the P / E because they are quite confident that future earnings are not threatened. It is difficult to see the share price drop sharply in the near future under these circumstances.
It is also worth noting that we have found 1 warning sign for the services of the Republic that you need to take into consideration.
If you are interested in P / E ratios, you might want to see this free collection of other companies that have sharply increased their profits and are trading on P / E below 20x.
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