With a price-to-earnings (or "P/E") ratio of 19.1x United States Lime & Minerals, Inc. (NASDAQ:USLM) 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 9x 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.
With earnings growth that's exceedingly strong of late, United States Lime & Minerals has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
View our latest analysis for United States Lime & Minerals
Is There Enough Growth For United States Lime & Minerals?
In order to justify its P/E ratio, United States Lime & Minerals would need to produce impressive growth in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 61%. The strong recent performance means it was also able to grow EPS by 161% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
This is in contrast to the rest of the market, which is expected to grow by 10% over the next year, materially lower than the company's recent medium-term annualised growth rates.
With this information, we can see why United States Lime & Minerals is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.
The Bottom Line On United States Lime & Minerals' P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that United States Lime & Minerals maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.
Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for United States Lime & Minerals with six simple checks will allow you to discover any risks that could be an issue.
Of course, you might also be able to find a better stock than United States Lime & Minerals. 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.