With a price-to-earnings (or "P/E") ratio of 27.9x Texas Roadhouse, Inc. (NASDAQ:TXRH) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. 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.

Recent times have been pleasing for Texas Roadhouse as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Texas Roadhouse

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Texas Roadhouse.

Is There Enough Growth For Texas Roadhouse?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Texas Roadhouse's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. This was backed up an excellent period prior to see EPS up by 458% in total over the last three years. 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 analysts covering the company suggest earnings should grow by 17% over the next year. With the market only predicted to deliver 10%, the company is positioned for a stronger earnings result.

With this information, we can see why Texas Roadhouse is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

As we suspected, our examination of Texas Roadhouse's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Texas Roadhouse is showing 2 warning signs in our investment analysis, you should know about.

You might be able to find a better investment than Texas Roadhouse. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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.