Pinning Down Fastenal Company's (NASDAQ:FAST) P/E Is Difficult Right Now

Fastenal Company's (NASDAQ:FAST) price-to-earnings (or "P/E") ratio of 38.5x 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 19x and even P/E's below 11x 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.

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Fastenal could be doing better as it's been growing earnings less than most other companies lately. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

See 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.

Does Growth Match The High P/E?

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 6.0% gain to the company's bottom line. The latest three year period has also seen a 15% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 9.3% each year during the coming three years according to the analysts following the company. With the market predicted to deliver 11% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Fastenal is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Fastenal's 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.

Our examination of Fastenal's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for Fastenal that you should be aware of.

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.