It's not a stretch to say that Snap-on Incorporated's (NYSE:SNA) price-to-earnings (or "P/E") ratio of 16.7x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 17x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent earnings growth for Snap-on has been in line with the market. The P/E is probably moderate because investors think this modest earnings performance will continue. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

Check out our latest analysis for Snap-on

Keen to find out how analysts think Snap-on's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The P/E?

Snap-on's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered a decent 3.8% gain to the company's bottom line. Pleasingly, EPS has also lifted 31% in aggregate from three years ago, partly 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.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 4.2% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 11% per year, which is noticeably more attractive.

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

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Snap-on currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Snap-on with six simple checks on some of these key factors.

If you're unsure about the strength of Snap-on's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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