There's Reason For Concern Over Lerøy Seafood Group ASA's (OB:LSG) Price

With a price-to-earnings (or "P/E") ratio of 18.1x Lerøy Seafood Group ASA (OB:LSG) may be sending very bearish signals at the moment, given that almost half of all companies in Norway have P/E ratios under 11x and even P/E's lower than 6x 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.

Lerøy Seafood Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Lerøy Seafood Group

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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 Lerøy Seafood Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 163% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 9.7% drop in EPS in aggregate. 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 27% each year as estimated by the six analysts watching the company. That's shaping up to be similar to the 25% per year growth forecast for the broader market.

In light of this, it's curious that Lerøy Seafood Group's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Lerøy Seafood Group's 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.

We've established that Lerøy Seafood Group currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 1 warning sign for Lerøy Seafood Group that we have uncovered.

You might be able to find a better investment than Lerøy Seafood Group. 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.