When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Installed Building Products, Inc. (NYSE:IBP) as a stock to potentially avoid with its 21.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Installed Building Products hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Installed Building Products' Growth Trending?

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

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Although pleasingly EPS has lifted 95% in aggregate from three years ago, notwithstanding the last 12 months. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 6.8% during the coming year according to the eleven analysts following the company. With the market predicted to deliver 13% growth , that's a disappointing outcome.

In light of this, it's alarming that Installed Building Products' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

What We Can Learn From Installed Building Products' 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 Installed Building Products currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Installed Building Products (including 1 which is significant).

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

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