Zotefoams plc's (LON:ZTF) P/E Is Still On The Mark Following 36% Share Price Bounce

Despite an already strong run, Zotefoams plc (LON:ZTF) shares have been powering on, with a gain of 36% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 42% in the last year.

After such a large jump in price, given close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 17x, you may consider Zotefoams as a stock to avoid entirely with its 27.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times haven't been advantageous for Zotefoams as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Zotefoams

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

How Is Zotefoams' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 7.8% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 28% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 20% each year during the coming three years according to the two analysts following the company. With the market only predicted to deliver 15% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Zotefoams is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has got Zotefoams' P/E rushing to great heights as well. 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 Zotefoams maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Zotefoams is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Zotefoams' 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.