Pinning Down CSW Industrials, Inc.'s (NYSE:CSW) P/E Is Difficult Right Now

With a price-to-earnings (or "P/E") ratio of 30.5x CSW Industrials, Inc. (NYSE:CSW) 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 18x and even P/E's lower than 11x 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.

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Recent times have been advantageous for CSW Industrials as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for CSW Industrials

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

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. The latest three year period has also seen an excellent 73% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 7.8% per year during the coming three years according to the six analysts following the company. That's shaping up to be materially lower than the 11% each year growth forecast for the broader market.

With this information, we find it concerning that CSW Industrials 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. There's a good chance these shareholders are 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 CSW Industrials 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. Take a look at our free balance sheet analysis for CSW Industrials with six simple checks on some of these key factors.

If you're unsure about the strength of CSW Industrials' 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.