Tri Pointe Homes, Inc.'s (NYSE:TPH) Earnings Are Not Doing Enough For Some Investors

Tri Pointe Homes, Inc.'s (NYSE:TPH) price-to-earnings (or "P/E") ratio of 7.8x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 35x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Tri Pointe Homes certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Tri Pointe Homes

Want the full picture on analyst estimates for the company? Then our free report on Tri Pointe Homes will help you uncover what's on the horizon.

Is There Any Growth For Tri Pointe Homes?

In order to justify its P/E ratio, Tri Pointe Homes would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. The strong recent performance means it was also able to grow EPS by 33% 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.

Looking ahead now, EPS is anticipated to slump, contracting by 6.3% during the coming year according to the six analysts following the company. With the market predicted to deliver 15% growth , that's a disappointing outcome.

In light of this, it's understandable that Tri Pointe Homes' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Tri Pointe Homes' P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Tri Pointe Homes maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You need to take note of risks, for example - Tri Pointe Homes has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

You might be able to find a better investment than Tri Pointe Homes. 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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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.