When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 18x, you may consider Columbia Sportswear Company (NASDAQ:COLM) as a stock to potentially avoid with its 25.1x 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 lofty.
There hasn’t been much to differentiate Columbia Sportswear’s and the market’s earnings growth lately. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.
NasdaqGS:COLM Price Based on Past Earnings October 8th 2021
free report on Columbia Sportswear
Does Growth Match The High P/E?
Columbia Sportswear’s P/E ratio would be typical for a company that’s expected to deliver solid growth, and importantly, perform better than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 41%. Pleasingly, EPS has also lifted 100% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 23% per annum during the coming three years according to the twelve analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 12% per annum, which is noticeably less attractive.
In light of this, it’s understandable that Columbia Sportswear’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 Bottom Line On Columbia Sportswear’s P/E
While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.
We’ve established that Columbia Sportswear 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. It’s hard to see the share price falling strongly in the near future under these circumstances.
We don’t want to rain on the parade too much, but we did also find 1 warning sign for Columbia Sportswear that you need to be mindful of.
It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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