With a price-to-earnings (or "P/E") ratio of 28.4x American Vanguard Corporation (NYSE:AVD) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 19x and even P/E's lower than 11x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
American Vanguard certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.NYSE:AVD Price Based on Past Earnings July 6th 2021 free report is a great place to start
Is There Enough Growth For American Vanguard?
In order to justify its P/E ratio, American Vanguard would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered an exceptional 72% gain to the company's bottom line. Still, incredibly EPS has fallen 18% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next year should generate growth of 27% as estimated by the two analysts watching the company. With the market only predicted to deliver 17%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that American Vanguard'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.
What We Can Learn From American Vanguard's P/E?
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.
We've established that American Vanguard 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. Unless these conditions change, they will continue to provide strong support to the share price.
Before you settle on your opinion, we've discovered 2 warning signs for American Vanguard that you should be aware of.
If these risks are making you reconsider your opinion on American Vanguard, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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