Investor Optimism Abounds Grand Canyon Education, Inc. (NASDAQ:LOPE) But Growth Is Lacking

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Grand Canyon Education, Inc. (NASDAQ:LOPE) as a stock to potentially avoid with its 19.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Grand Canyon Education has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Grand Canyon Education

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

How Is Grand Canyon Education's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Grand Canyon Education's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 20%. As a result, it also grew EPS by 28% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 10% as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 13% growth forecast for the broader market.

In light of this, it's alarming that Grand Canyon Education's P/E sits above the majority of other companies. 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 Final Word

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 Grand Canyon Education 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Grand Canyon Education that you need to be mindful of.

If these risks are making you reconsider your opinion on Grand Canyon Education, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.