It's not a stretch to say that InvoCare Limited's (ASX:IVC) price-to-earnings (or "P/E") ratio of 17.8x right now seems quite "middle-of-the-road" compared to the market in Australia, where the median P/E ratio is around 17x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's superior to most other companies of late, InvoCare has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.

See our latest analysis for InvoCare

Keen to find out how analysts think InvoCare's future stacks up against the industry? In that case, our free report is a great place to start.

How Is InvoCare's Growth Trending?

In order to justify its P/E ratio, InvoCare would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 47% gain to the company's bottom line. Still, incredibly EPS has fallen 14% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 1.2% per year over the next three years. With the market predicted to deliver 13% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's curious that InvoCare's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From InvoCare's P/E?

The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that InvoCare currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.