When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Portillo's Inc. (NASDAQ:PTLO) as a stock to avoid entirely with its 40.2x P/E ratio.  However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.  

With its earnings growth in positive territory compared to the declining earnings of most other companies, Portillo's has been doing quite well of late.   It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock.  If not, then existing shareholders might be a little nervous about the viability of the share price.    

NasdaqGS:PTLO Price to Earnings Ratio vs Industry April 28th 2024

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Portillo's.

Does Growth Match The High P/E?  

Portillo's' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.  

If we review the last year of earnings growth, the company posted a terrific increase of 24%.   Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall.  Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.  

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 31% each year over the next three years.  With the market only predicted to deliver 11% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Portillo's is trading at such a high P/E compared to the market.  It seems most investors are expecting this strong future growth and are willing to pay more for the stock.  

The Key Takeaway

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 Portillo's 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.    

We don't want to rain on the parade too much, but we did also find 1 warning sign for Portillo's that you need to be mindful of.  

Of course, you might also be able to find a better stock than Portillo's. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.