Laboratorio Farmaceutico Erfo S.p.A.'s (BIT:ERFO) P/E Still Appears To Be Reasonable

Laboratorio Farmaceutico Erfo S.p.A.'s (BIT:ERFO) price-to-earnings (or "P/E") ratio of 31.6x might make it look like a strong sell right now compared to the market in Italy, where around half of the companies have P/E ratios below 15x and even P/E's below 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Laboratorio Farmaceutico Erfo hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Laboratorio Farmaceutico Erfo

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How Is Laboratorio Farmaceutico Erfo's Growth Trending?

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

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%. The last three years don't look nice either as the company has shrunk EPS by 95% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 39% each year over the next three years. That's shaping up to be materially higher than the 18% each year growth forecast for the broader market.

In light of this, it's understandable that Laboratorio Farmaceutico Erfo's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

We've established that Laboratorio Farmaceutico Erfo 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. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Laboratorio Farmaceutico Erfo has 4 warning signs we think you should be aware of.

You might be able to find a better investment than Laboratorio Farmaceutico Erfo. 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.