CMS Energy Corporation's (NYSE:CMS) price-to-earnings (or "P/E") ratio of 20.3x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent earnings growth for CMS Energy has been in line with the market. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
Check out our latest analysis for CMS Energy
Is There Enough Growth For CMS Energy?
There's an inherent assumption that a company should outperform the market for P/E ratios like CMS Energy's to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.4% last year. The solid recent performance means it was also able to grow EPS by 26% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 7.4% per year during the coming three years according to the twelve analysts following the company. With the market predicted to deliver 10% growth per annum, the company is positioned for a weaker earnings result.
In light of this, it's alarming that CMS Energy's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Bottom Line On CMS Energy'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 CMS Energy'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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Before you take the next step, you should know about the 2 warning signs for CMS Energy (1 is a bit concerning!) that we have uncovered.
If you're unsure about the strength of CMS Energy'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.