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When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 17x, you may consider CVS Group plc (LON:CVSG) as a stock to avoid entirely with its 68.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
CVS Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
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How Is CVS Group's Growth Trending?
CVS Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Retrospectively, the last year delivered an exceptional 84% gain to the company's bottom line. As a result, it also grew EPS by 5.9% 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.
Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 17% per annum over the next three years. That's shaping up to be materially higher than the 13% per annum growth forecast for the broader market.
With this information, we can see why CVS Group 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.
The Bottom Line On CVS Group's P/E
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.
We've established that CVS Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.
Having said that, be aware CVS Group is showing 1 warning sign in our investment analysis, you should know about.