Laboratorio Farmaceutico Erfo S.p.A. (BIT:ERFO) Stocks Shoot Up 32% But Its P/E Still Looks Reasonable

Despite an already strong run, Laboratorio Farmaceutico Erfo S.p.A. (BIT:ERFO) shares have been powering on, with a gain of 32% in the last thirty days. The last 30 days bring the annual gain to a very sharp 58%.

Following the firm bounce in price, given close to half the companies in Italy have price-to-earnings ratios (or "P/E's") below 17x, you may consider Laboratorio Farmaceutico Erfo as a stock to avoid entirely with its 40.8x 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.

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While the market has experienced earnings growth lately, Laboratorio Farmaceutico Erfo's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Laboratorio Farmaceutico Erfo

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Laboratorio Farmaceutico Erfo.

Does Growth Match The High P/E?

Laboratorio Farmaceutico Erfo's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 40%. As a result, earnings from three years ago have also fallen 95% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 50% per annum as estimated by the one analyst watching the company. With the market only predicted to deliver 20% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Laboratorio Farmaceutico Erfo's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Shares in Laboratorio Farmaceutico Erfo have built up some good momentum lately, which has really inflated its P/E. 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.

As we suspected, our examination of Laboratorio Farmaceutico Erfo'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. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Laboratorio Farmaceutico Erfo is showing 4 warning signs in our investment analysis, you should know about.

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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