With a price-to-earnings (or "P/E") ratio of 31.3x Liquidity Services, Inc. (NASDAQ:LQDT) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 17x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Liquidity Services 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.
Is There Enough Growth For Liquidity Services?
The only time you'd be truly comfortable seeing a P/E as steep as Liquidity Services' is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 52% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 248% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next year should generate growth of 22% as estimated by the two analysts watching the company. With the market only predicted to deliver 12%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Liquidity Services' 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.
What We Can Learn From Liquidity Services' 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 Liquidity Services maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
You should always think about risks. Case in point, we've spotted 2 warning signs for Liquidity Services you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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