H&E Equipment Services, Inc. (NASDAQ: HEES) A price-to-earnings (or “P / E”) ratio of 78.9x could make it look like selling is strong right now relative to the US market, where about half of the companies have a P / E ratios less than 17x and even P / E less than 10x are quite common. However, it is not wise to just take the P / E at face value as there may be an explanation why it is so high.

H&E Equipment Services could do better as its profits have fallen in recent times while most other companies have recorded positive profit growth. One possibility is that the P / E is high because investors think this poor earnings performance will turn the page. If not, existing shareholders may be extremely concerned about the viability of the share price.

NasdaqGS price: HEES based on past earnings September 19, 2021
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Is there enough growth for H&E equipment services?

H&E Equipment Services’ P / E ratio would be typical of a business expected to experience very strong growth and, most importantly, much better performance than the market.

Looking back at the results of the past year, the company’s profits have fallen discouragingly to 31%. This means that it has also seen a decline in profits in the longer term, with EPS falling by 88% overall in the past three years. As a result, shareholders would have been disappointed with the medium-term earnings growth rates.

As for the outlook, the next three years are expected to generate growth of 96% per year according to estimates from the four analysts who watch the company. Meanwhile, the rest of the market is only expected to grow by 12% per year, which is significantly less attractive.

With this information, we can see why H&E Equipment Services is trading at such a high P / E relative to the market. Apparently, shareholders are unwilling to get rid of something that potentially contemplates a more prosperous future.

The last word

We would say that the power of the price / earnings ratio is not primarily as a valuation instrument, but rather to assess current investor sentiment and future expectations.

As we suspected, our review of H&E Equipment Services analyst forecasts revealed that its superior earnings outlook is contributing to its high P / E. Right now, shareholders are comfortable with the P / E because they are quite confident that future earnings are not threatened. It is difficult to see the share price drop sharply in the near future under these circumstances.

Remember that there may be other risks. For example, we have identified 3 warning signs for H&E equipment services (1 should not be ignored) you should be aware of this.

It’s important to make sure you research a great company, not just the first idea you come across. So take a look at this free list of interesting companies with recent strong earnings growth (and a P / E ratio of less than 20x).

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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