Improved Earnings Required Before Cirrus Logic, Inc. (NASDAQ:CRUS) Shares Find Their Feet

Cirrus Logic, Inc.'s (NASDAQ:CRUS) price-to-earnings (or "P/E") ratio of 16.9x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E's above 36x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Cirrus Logic certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Cirrus Logic

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

How Is Cirrus Logic's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Cirrus Logic's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 135% last year. The strong recent performance means it was also able to grow EPS by 47% in total over the last three years. 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 2.0% per annum during the coming three years according to the six analysts following the company. With the market predicted to deliver 11% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why Cirrus Logic is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Cirrus Logic's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Cirrus Logic maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Cirrus Logic with six simple checks on some of these key factors.

If you're unsure about the strength of Cirrus Logic's 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.