Lotus Bakeries NV's (EBR:LOTB) Shareholders Might Be Looking For Exit

With a price-to-earnings (or "P/E") ratio of 33.2x Lotus Bakeries NV (EBR:LOTB) may be sending very bearish signals at the moment, given that almost half of all companies in Belgium have P/E ratios under 13x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been advantageous for Lotus Bakeries as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Lotus Bakeries

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Is There Enough Growth For Lotus Bakeries?

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 managed to grow earnings per share by a handy 11% last year. The latest three year period has also seen a 22% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 8.2% per annum during the coming three years according to the twin analysts following the company. That's shaping up to be similar to the 9.0% per annum 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 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 Lotus Bakeries currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Lotus Bakeries, and understanding should be part of your investment process.

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

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