Sterling Construction Company, Inc.'s (NASDAQ:STRL) price-to-earnings (or "P/E") ratio of 7.5x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 19x and even P/E's above 38x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Sterling Construction Company 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. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Keen to find out how analysts think Sterling Construction Company's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Sterling Construction Company's Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Sterling Construction Company's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 108% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Looking ahead now, EPS is anticipated to slump, contracting by 13% during the coming year according to the two analysts following the company. Meanwhile, the broader market is forecast to expand by 5.1%, which paints a poor picture.
With this information, we are not surprised that Sterling Construction Company is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Bottom Line On Sterling Construction 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.
We've established that Sterling Construction Company maintains its low P/E on the weakness of its forecast for sliding earnings, 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.
And what about other risks? Every company has them, and we've spotted 4 warning signs for Sterling Construction Company (of which 1 makes us a bit uncomfortable!) you should know about.
If you're unsure about the strength of Sterling Construction Company's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
This article by Simply Wall St is general in nature. 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.
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