Chocoladefabriken Lindt & Sprüngli AG (VTX:LISN) Investors Are Less Pessimistic Than Expected

Chocoladefabriken Lindt & Sprüngli AG's (VTX:LISN) price-to-earnings (or "P/E") ratio of 34.2x might make it look like a strong sell right now compared to the market in Switzerland, where around half of the companies have P/E ratios below 20x and even P/E's below 13x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's superior to most other companies of late, Chocoladefabriken Lindt & Sprüngli has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Chocoladefabriken Lindt & Sprüngli

Want the full picture on analyst estimates for the company? Then our free report on Chocoladefabriken Lindt & Sprüngli will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The High P/E?

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

If we review the last year of earnings growth, the company posted a worthy increase of 9.5%. Pleasingly, EPS has also lifted 79% in aggregate from three years ago, partly 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 4.8% per annum as estimated by the analysts watching the company. That's shaping up to be materially lower than the 13% per year growth forecast for the broader market.

With this information, we find it concerning that Chocoladefabriken Lindt & Sprüngli is trading at a P/E higher than the market. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Chocoladefabriken Lindt & Sprüngli currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Chocoladefabriken Lindt & Sprüngli with six simple checks.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.