What You Can Learn From Credit Acceptance Corporation's (NASDAQ:CACC) P/E

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Credit Acceptance Corporation (NASDAQ:CACC) as a stock to potentially avoid with its 20.8x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Credit Acceptance hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Credit Acceptance

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

Does Growth Match The High P/E?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 46%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 11% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 26% during the coming year according to the four analysts following the company. That's shaping up to be materially higher than the 10% growth forecast for the broader market.

With this information, we can see why Credit Acceptance is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Credit Acceptance's P/E

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.

As we suspected, our examination of Credit Acceptance's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Credit Acceptance.

You might be able to find a better investment than Credit Acceptance. 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.