With a price-to-earnings (or "P/E") ratio of 6.6x LGI Homes, Inc. (NASDAQ:LGIH) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 34x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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LGI Homes hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for LGI Homes

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

How Is LGI Homes' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as LGI Homes' is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 3.0% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 53% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 16% during the coming year according to the four analysts following the company. With the market predicted to deliver 13% growth , that's a disappointing outcome.

In light of this, it's understandable that LGI Homes' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On LGI Homes' P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that LGI Homes 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 1 warning sign for LGI Homes you should know about.

Of course, you might also be able to find a better stock than LGI Homes. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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