When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider CoreCard Corporation (NYSE:CCRD) as a stock to avoid entirely with its 26.7x 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 so lofty.
CoreCard certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for CoreCard
What Are Growth Metrics Telling Us About The High P/E?
CoreCard's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 69% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 32% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 27% during the coming year according to the one analyst following the company. 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 CoreCard's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From CoreCard's P/E?
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.
As we suspected, our examination of CoreCard'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. 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 1 warning sign for CoreCard that you need to take into consideration.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.