The price is right for WPP plc (LON:WPP)

When almost half of companies in the UK have a price-to-earnings (or “P/E”) ratio of under 16x, you might think about it WPP plc (LON:WPP) is a stock to avoid with its P/E ratio of 45.7. However, it is not advisable to simply take the P/E ratio at face value, as there may be an explanation as to why it is so high.

WPP could do better as its profits have been declining recently while most other companies have seen positive profit growth. One possibility is that the P/E ratio is high because investors believe this poor earnings performance will turn things around. You’d really hope so, otherwise you’ll be paying a pretty hefty price for no particular reason.

Check out our latest analysis for WPP

Want a complete overview of analyst estimates for the company? Then ours free The WPP report will help you figure out what’s on the horizon.

Is there enough growth for WPP?

A P/E ratio as high as WPP can only really be considered pleasant if the company’s growth is on track to significantly outperform the market.

Looking back, last year resulted in a frustrating 62% decline in the company’s profits. As a result, overall returns from three years ago have also fallen by 53%. Therefore, it’s fair to say that the recent earnings growth has been undesirable for the company.

As for the outlook, the twelve analysts covering the company are expected to generate growth of 58% per year over the next three years. With the market forecast to deliver just 13% each year, the company is positioned for a better outcome.

Using this information, we can see why WPP trades at such a high P/E ratio compared to the market. It seems that most investors are expecting this strong future growth and are willing to pay more for the stock.

What can we learn from WPP’s P/E ratio?

Deciding whether to sell your stock based solely on price-to-earnings ratios doesn’t make sense, but it can be a practical guide to the company’s future prospects.

We have found that WPP can maintain its high P/E ratio as forecast growth is expected to be higher than the overall market. At this point, investors believe the potential for earnings deterioration is not great enough to justify a lower P/E ratio. Under these circumstances, it’s hard to imagine the share price falling sharply in the near future.

Be aware of this WPP shows three warning signs in our investment analysis, and one of them is potentially serious.

If these Risks cause you to reconsider your opinion of WPPExplore our interactive list of high-quality stocks to get an idea of ​​what else is out there.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.