Pelatro Plc's (LON:PTRO) price-to-earnings (or "P/E") ratio of 26x might make it look like a strong sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 15x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Pelatro has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Pelatro

Keen to find out how analysts think Pelatro'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 Pelatro's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 69%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 12% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth will be highly resilient over the next year growing by 1.9%. Meanwhile, the broader market is forecast to contract by 8.3%, which would indicate the company is doing very well.

With this information, we can see why Pelatro is trading at such a high P/E compared to the market. At this time, shareholders aren't keen to offload something that is potentially eyeing a much more prosperous future.

The Final Word

The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Pelatro's analyst forecasts revealed that its superior earnings outlook against a shaky market 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. We still remain cautious about the company's ability to keep swimming against the current of the broader market turmoil. Although, if the company's prospects don't change they will continue to provide strong support to the share price.

Plus, you should also learn about these 4 warning signs we've spotted with Pelatro.

If you're unsure about the strength of Pelatro's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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