Lotus Bakeries NV's (EBR:LOTB) Price Is Out Of Tune With Earnings

When close to half the companies in Belgium have price-to-earnings ratios (or "P/E's") below 13x, you may consider Lotus Bakeries NV (EBR:LOTB) as a stock to avoid entirely with its 65.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Lotus Bakeries certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Lotus Bakeries

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How Is Lotus Bakeries' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Lotus Bakeries' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. Pleasingly, EPS has also lifted 54% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 10% per annum as estimated by the six analysts watching the company. That's shaping up to be similar to the 11% each year growth forecast for the broader market.

In light of this, it's curious that Lotus Bakeries' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Lotus Bakeries' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Lotus Bakeries with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Lotus Bakeries' 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.