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When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Autohome Inc. (NYSE:ATHM) as a stock to potentially avoid with its 23.8x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Autohome has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
How Does Autohome's P/E Ratio Compare To Its Industry Peers?
It's plausible that Autohome's high P/E ratio could be a result of tendencies within its own industry. The image below shows that the Interactive Media and Services industry as a whole has a P/E ratio significantly higher than the market. So it appears the company's ratio could be influenced somewhat by these industry numbers currently. Ordinarily, the majority of companies' P/E's would be lifted firmly by the general conditions within the Interactive Media and Services industry. Nevertheless, the company's P/E should be primarily influenced by its own financial performance.
Want the full picture on analyst estimates for the company? Then our free report on Autohome will help you uncover what's on the horizon.
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Autohome's is when the company's growth is on track to outshine the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 2.7% last year. This was backed up an excellent period prior to see EPS up by 132% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 11% per annum over the next three years. That's shaping up to be materially higher than the 9.2% each year growth forecast for the broader market.
In light of this, it's understandable that Autohome's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
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.
As we suspected, our examination of Autohome'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.
A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Autohome with six simple checks on some of these key factors.
Of course, you might also be able to find a better stock than Autohome. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
This article by Simply Wall St is general in nature. 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.
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