With a price-to-earnings (or "P/E") ratio of 18.1x Caribbean Utilities Company, Ltd. (TSE:CUP.U) may be sending very bearish signals at the moment, given that almost half of all companies in Canada have P/E ratios under 10x and even P/E's lower than 4x 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 so lofty.

Recent times haven't been advantageous for Caribbean Utilities Company as its earnings have been rising slower than most other companies. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Caribbean Utilities Company

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Caribbean Utilities Company.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Caribbean Utilities Company would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 5.1%. However, this wasn't enough as the latest three year period has seen an unpleasant 3.3% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 9.4% over the next year. That's shaping up to be materially lower than the 14% growth forecast for the broader market.

With this information, we find it concerning that Caribbean Utilities Company 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.

The Bottom Line On Caribbean Utilities Company'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.

Our examination of Caribbean Utilities Company'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. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.