Investors Appear Satisfied With Cars.com Inc.'s (NYSE:CARS) Prospects

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Cars.com Inc. (NYSE:CARS) as a stock to potentially avoid with its 25.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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While the market has experienced earnings growth lately, Cars.com's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Cars.com

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

How Is Cars.com's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Cars.com's is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 20%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 750% in total over the last three years. 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 26% per year as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 11% per annum growth forecast for the broader market.

In light of this, it's understandable that Cars.com's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Cars.com maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Cars.com (1 is concerning!) that you need to be mindful of.

If you're unsure about the strength of Cars.com's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.