Chesapeake Utilities Corporation's (NYSE:CPK) Share Price Not Quite Adding Up

Chesapeake Utilities Corporation's (NYSE:CPK) price-to-earnings (or "P/E") ratio of 25.7x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Chesapeake Utilities has been very sluggish. 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. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Chesapeake Utilities

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

How Is Chesapeake Utilities' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Chesapeake Utilities' 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 6.3%. This means it has also seen a slide in earnings over the longer-term as EPS is down 7.3% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 12% each year over the next three years. That's shaping up to be similar to the 10% per year growth forecast for the broader market.

In light of this, it's curious that Chesapeake Utilities' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Chesapeake Utilities' 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.

Our examination of Chesapeake Utilities' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Chesapeake Utilities (1 is a bit unpleasant!) that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.