Chocoladefabriken Lindt & Sprüngli AG's (VTX:LISN) Shares May Have Run Too Fast Too Soon

Chocoladefabriken Lindt & Sprüngli AG's (VTX:LISN) price-to-earnings (or "P/E") ratio of 36.6x 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 21x 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.

Chocoladefabriken Lindt & Sprüngli 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. 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

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

How Is Chocoladefabriken Lindt & Sprüngli's Growth Trending?

In order to justify its P/E ratio, Chocoladefabriken Lindt & Sprüngli would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. The latest three year period has also seen an excellent 118% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 5.1% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 10% per year, which is noticeably more attractive.

With this information, we find it concerning that Chocoladefabriken Lindt & Sprüngli is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Key Takeaway

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 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. Our free balance sheet analysis for Chocoladefabriken Lindt & Sprüngli with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Chocoladefabriken Lindt & Sprüngli. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

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