After Leaping 25% Fevertree Drinks PLC (LON:FEVR) Shares Are Not Flying Under The Radar

The Fevertree Drinks PLC (LON:FEVR) share price has done very well over the last month, posting an excellent gain of 25%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 30% in the last twelve months.

Following the firm bounce in price, Fevertree Drinks may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 43.7x, since almost half of all companies in the United Kingdom have P/E ratios under 15x and even P/E's lower than 8x are not unusual. 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, Fevertree Drinks has been doing relatively well. 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.

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How Is Fevertree Drinks' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Fevertree Drinks' is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 58% last year. Still, incredibly EPS has fallen 50% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 20% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 16% per year, which is noticeably less attractive.

With this information, we can see why Fevertree Drinks 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.

What We Can Learn From Fevertree Drinks' P/E?

Fevertree Drinks' P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Fevertree Drinks' 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.

Before you take the next step, you should know about the 1 warning sign for Fevertree Drinks that we have uncovered.

If you're unsure about the strength of Fevertree Drinks' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.