There's Reason For Concern Over Lotus Bakeries NV's (EBR:LOTB) Price

Lotus Bakeries NV's (EBR:LOTB) price-to-earnings (or "P/E") ratio of 46x might make it look like a strong sell right now compared to the market in Belgium, where around half of the companies have P/E ratios below 14x and even P/E's below 8x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Lotus Bakeries has been doing relatively well. 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

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

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 grew earnings per share by an impressive 18% last year. Pleasingly, EPS has also lifted 68% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 12% each year as estimated by the seven analysts watching the company. With the market predicted to deliver 14% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Lotus Bakeries' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Lotus Bakeries with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Lotus Bakeries. 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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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.