With Laboratorios Farmaceuticos Rovi, S.A. (BME:ROVI) It Looks Like You'll Get What You Pay For

When close to half the companies in Spain have price-to-earnings ratios (or "P/E's") below 18x, you may consider Laboratorios Farmaceuticos Rovi, S.A. (BME:ROVI) as a stock to potentially avoid with its 26.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Laboratorios Farmaceuticos Rovi hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Laboratorios Farmaceuticos Rovi

Want the full picture on analyst estimates for the company? Then our free report on Laboratorios Farmaceuticos Rovi will help you uncover what's on the horizon.

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

Laboratorios Farmaceuticos Rovi's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's bottom line. Even so, admirably EPS has lifted 94% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 27% per annum as estimated by the seven analysts watching the company. With the market only predicted to deliver 12% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Laboratorios Farmaceuticos Rovi is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Laboratorios Farmaceuticos Rovi's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Laboratorios Farmaceuticos Rovi (1 makes us a bit uncomfortable!) that you need to be mindful of.

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.

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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.