When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Grand Canyon Education, Inc. (NASDAQ:LOPE) as a stock to potentially avoid with its 24x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.
With earnings growth that's superior to most other companies of late, Grand Canyon Education has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Grand Canyon Education
Does Growth Match The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like Grand Canyon Education's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 11%. The latest three year period has also seen an excellent 40% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 10% as estimated by the three analysts watching the company. With the market predicted to deliver 13% growth , the company is positioned for a weaker earnings result.
With this information, we find it concerning that Grand Canyon Education is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
What We Can Learn From Grand Canyon Education's P/E?
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Grand Canyon Education'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. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
You should always think about risks. Case in point, we've spotted 1 warning sign for Grand Canyon Education you should be aware of.
If you're unsure about the strength of Grand Canyon Education's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.