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With a price-to-earnings (or "P/E") ratio of 10.1x CRH plc (LON:CRH) may be sending bullish signals at the moment, given that almost half of all companies in the United Kingdom have P/E ratios greater than 14x and even P/E's higher than 28x 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 limited.
Recent times have been advantageous for CRH as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
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Keen to find out how analysts think CRH's future stacks up against the industry? In that case, our free report is a great place to start.
How Is CRH's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as CRH's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 130%. Pleasingly, EPS has also lifted 88% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 5.9% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 11% per year, which is noticeably more attractive.
In light of this, it's understandable that CRH's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Bottom Line On CRH's 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.
We've established that CRH maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for CRH with six simple checks.