With a price-to-earnings (or "P/E") ratio of 22.1x RLI Corp. (NYSE:RLI) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 8x are not unusual.  Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.  

RLI hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average.   One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner.  If not, then existing shareholders may be extremely nervous about the viability of the share price.    

View our latest analysis for RLI

NYSE:RLI Price to Earnings Ratio vs Industry January 17th 2024

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

Does Growth Match The High P/E?  

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

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 51%.   Even so, admirably EPS has lifted 124% in aggregate from three years ago, notwithstanding the last 12 months.  Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.  

Looking ahead now, EPS is anticipated to climb by 2.2% per annum during the coming three years according to the seven analysts following the company.  With the market predicted to deliver 13% growth  per annum, the company is positioned for a weaker earnings result.

In light of this, it's alarming that RLI's P/E sits above the majority of other companies.  It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen.  There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.  

What We Can Learn From RLI'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.

Our examination of RLI's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted.  Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long.  Unless these conditions improve markedly, it's very 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 RLI (1 is significant!) that you need to be mindful of.  

Of course, you might also be able to find a better stock than RLI. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.