Franklin Electric Co., Inc.'s (NASDAQ:FELE) price-to-earnings (or "P/E") ratio of 26.2x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Franklin Electric's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Franklin Electric

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

Is There Enough Growth For Franklin Electric?

In order to justify its P/E ratio, Franklin Electric would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 6.1%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 19% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 7.3% over the next year. Meanwhile, the rest of the market is forecast to expand by 14%, which is noticeably more attractive.

With this information, we find it concerning that Franklin Electric 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Franklin Electric currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Franklin Electric with six simple checks.

You might be able to find a better investment than Franklin Electric. 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).

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