P/F Bakkafrost's (OB:BAKKA) P/E Is On The Mark

P/F Bakkafrost's (OB:BAKKA) price-to-earnings (or "P/E") ratio of 72.9x might make it look like a strong sell right now compared to the market in Norway, where around half of the companies have P/E ratios below 12x and even P/E's below 7x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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While the market has experienced earnings growth lately, P/F Bakkafrost's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for P/F Bakkafrost

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 72% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 74% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 91% per year as estimated by the six analysts watching the company. That's shaping up to be materially higher than the 19% per annum growth forecast for the broader market.

With this information, we can see why P/F Bakkafrost 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

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that P/F Bakkafrost maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

Before you settle on your opinion, we've discovered 1 warning sign for P/F Bakkafrost that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.