Why Investors Shouldn't Be Surprised By Viva Leisure Limited's (ASX:VVA) 29% Share Price Surge

The Viva Leisure Limited (ASX:VVA) share price has done very well over the last month, posting an excellent gain of 29%. Looking further back, the 23% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, Viva Leisure may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 32.2x, since almost half of all companies in Australia have P/E ratios under 20x and even P/E's lower than 12x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Viva Leisure certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Viva Leisure

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How Is Viva Leisure's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Viva Leisure's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 47% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 66% each year during the coming three years according to the two analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 16% per annum, which is noticeably less attractive.

With this information, we can see why Viva Leisure is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Shares in Viva Leisure have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Viva Leisure's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Viva Leisure.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.