With Cairn Homes plc (LON:CRN) It Looks Like You'll Get What You Pay For

With a price-to-earnings (or "P/E") ratio of 56.6x Cairn Homes plc (LON:CRN) may be sending very bearish signals at the moment, given that almost half of all companies in the United Kingdom have P/E ratios under 24x and even P/E's lower than 14x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings that are retreating more than the market's of late, Cairn Homes has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Cairn Homes

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Is There Enough Growth For Cairn Homes?

The only time you'd be truly comfortable seeing a P/E as steep as Cairn Homes' is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 74%. Still, the latest three year period has seen an excellent 177% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 82% per year during the coming three years according to the seven analysts following the company. With the market only predicted to deliver 20% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Cairn Homes' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Cairn Homes maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Cairn Homes that you should be aware of.

Of course, you might also be able to find a better stock than Cairn Homes. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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This article by Simply Wall St is general in nature. 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.
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