The Price Is Right For Persimmon Plc (LON:PSN)

There wouldn't be many who think Persimmon Plc's (LON:PSN) price-to-earnings (or "P/E") ratio of 16.4x is worth a mention when the median P/E in the United Kingdom is similar at about 16x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Persimmon's earnings growth of late has been pretty similar to most other companies. 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 Persimmon

Keen to find out how analysts think Persimmon'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?

The only time you'd be comfortable seeing a P/E like Persimmon's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a worthy increase of 4.5%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 66% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 16% each year during the coming three years according to the analysts following the company. That's shaping up to be similar to the 16% per year growth forecast for the broader market.

With this information, we can see why Persimmon is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

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 Persimmon maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless these conditions change, they will continue to support the share price at these levels.

Before you settle on your opinion, we've discovered 1 warning sign for Persimmon that you should be aware of.

If you're unsure about the strength of Persimmon'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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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.