Fastenal Company’s (NASDAQ:FAST) price-to-earnings (or “P/E”) ratio of 32.1x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E’s below 9x are quite common. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s so lofty.

Recent times have been pleasing for Fastenal as its earnings have risen in spite of the market’s earnings going into reverse. 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.

Check out our latest analysis for Fastenal

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

How Is Fastenal’s Growth Trending?

The only time you’d be truly comfortable seeing a P/E as steep as Fastenal’s is when the company’s growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 4.2% gain to the company’s bottom line. The latest three year period has also seen an excellent 34% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 8.0% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 10% each year, which is not materially different.

With this information, we find it interesting that Fastenal is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Typically, we’d caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We’ve established that Fastenal currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it’s challenging to accept these prices as being reasonable.

The company’s balance sheet is another key area for risk analysis. Our free balance sheet analysis for Fastenal with six simple checks will allow you to discover any risks that could be an issue.

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

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com