The Price Is Right For Credit Acceptance Corporation (NASDAQ:CACC) Even After Diving 25%

Credit Acceptance Corporation (NASDAQ:CACC) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Longer-term shareholders would now have taken a real hit with the stock declining 4.1% in the last year.

In spite of the heavy fall in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may still consider Credit Acceptance as a stock to avoid entirely with its 30.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Credit Acceptance has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Credit Acceptance

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

How Is Credit Acceptance's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 44% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 71% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 100% over the next year. That's shaping up to be materially higher than the 14% growth forecast for the broader market.

In light of this, it's understandable that Credit Acceptance's 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

Even after such a strong price drop, Credit Acceptance's P/E still exceeds the rest of the market significantly. 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 Credit Acceptance maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Credit Acceptance (1 is significant!) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.