Bright Horizons Family Solutions Inc.'s (NYSE:BFAM) price-to-earnings (or "P/E") ratio of 43.4x 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 17x and even P/E's below 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Bright Horizons Family Solutions has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Bright Horizons Family Solutions
How Is Bright Horizons Family Solutions' Growth Trending?
In order to justify its P/E ratio, Bright Horizons Family Solutions would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 94%. Pleasingly, EPS has also lifted 105% 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.
Turning to the outlook, the next three years should generate growth of 16% per year as estimated by the nine analysts watching the company. That's shaping up to be materially higher than the 10% per annum growth forecast for the broader market.
In light of this, it's understandable that Bright Horizons Family Solutions' 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 Bright Horizons Family Solutions' P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Bright Horizons Family Solutions' analyst forecasts revealed that its superior earnings outlook 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. Unless these conditions change, they will continue to provide strong support to the share price.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Bright Horizons Family Solutions that you should be aware of.
Of course, you might also be able to find a better stock than Bright Horizons Family Solutions. 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.