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When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 14x, you may consider Walmart Inc. (NYSE:WMT) as a stock to avoid entirely with its 43.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Recent times have been advantageous for Walmart 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 Walmart
Keen to find out how analysts think Walmart's future stacks up against the industry? In that case, our free report is a great place to start.
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as Walmart's is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 34% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 33% per year over the next three years. That's shaping up to be materially higher than the 9.3% each year growth forecast for the broader market.
In light of this, it's understandable that Walmart's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
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 Walmart's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
It is also worth noting that we have found 3 warning signs for Walmart that you need to take into consideration.
Of course, you might also be able to find a better stock than Walmart. 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.