Investors Interested In The City Pub Group plc's (LON:CPC) Earnings

The City Pub Group plc's (LON:CPC) price-to-earnings (or "P/E") ratio of 32.7x might make it look like a strong sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 15x and even P/E's below 8x are quite common. 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.

City Pub Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for City Pub Group

Does City Pub Group Have A Relatively High Or Low P/E For Its Industry?

It's plausible that City Pub Group's particularly high P/E ratio could be a result of tendencies within its own industry. It turns out the Hospitality industry in general also has a P/E ratio higher than the market, as the graphic below shows. So it appears the company's ratio could be influenced somewhat by these industry numbers currently. In the context of the Hospitality industry's current setting, most of its constituents' P/E's would be expected to be raised up. We'd highlight though, the spotlight should be on the anticipated direction of the company's earnings.

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

How Is City Pub Group's Growth Trending?

In order to justify its P/E ratio, City Pub Group would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 36%. Even so, admirably EPS has lifted 48% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 36% per annum as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.0% each year, which is noticeably less attractive.

In light of this, it's understandable that City Pub Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On City Pub Group's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that City Pub Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 6 warning signs for City Pub Group (of which 2 don't sit too well with us!) you should know about.

If these risks are making you reconsider your opinion on City Pub Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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