With a price-to-earnings (or "P/E") ratio of 23.9x Credit Acceptance Corporation (NASDAQ:CACC) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 17x 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 that are retreating more than the market's of late, Credit Acceptance 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.
What Are Growth Metrics Telling Us About The High P/E?
Credit Acceptance's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
Retrospectively, the last year delivered a frustrating 44% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 1.4% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 65% as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 11%, which is noticeably less attractive.
With this information, we can see why Credit Acceptance is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
What We Can Learn From Credit Acceptance'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 Credit Acceptance's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
It is also worth noting that we have found 1 warning sign for Credit Acceptance that you need to take into consideration.
If these risks are making you reconsider your opinion on Credit Acceptance, explore our interactive list of high quality stocks to get an idea of what else is out there.
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