With a price-to-earnings (or "P/E") ratio of 59.2x GCP Applied Technologies Inc. (NYSE:GCP) may be sending very 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. 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.
GCP Applied Technologies certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Although there are no analyst estimates available for GCP Applied Technologies, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as GCP Applied Technologies' is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered an exceptional 115% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 9.0% shows it's a great look while it lasts.
With this information, we can see why GCP Applied Technologies is trading at a high P/E compared to the market. Investors are willing to pay more for a stock they hope will buck the trend of the broader market going backwards. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.
What We Can Learn From GCP Applied Technologies' 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.
As we suspected, our examination of GCP Applied Technologies revealed its growing earnings over the medium-term are contributing to its high P/E, given the market is set to shrink. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.
We don't want to rain on the parade too much, but we did also find 4 warning signs for GCP Applied Technologies (1 shouldn't be ignored!) that you need to be mindful of.
If these risks are making you reconsider your opinion on GCP Applied Technologies, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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