When close to half the companies in Norway have price-to-earnings ratios (or "P/E's") below 11x, you may consider SalMar ASA (OB:SALM) as a stock to avoid entirely with its 19.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for SalMar as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for SalMar
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 SalMar's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 280%. The strong recent performance means it was also able to grow EPS by 62% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 20% per annum over the next three years. That's shaping up to be similar to the 23% per year growth forecast for the broader market.
In light of this, it's curious that SalMar'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. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
The Key Takeaway
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.
Our examination of SalMar's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
And what about other risks? Every company has them, and we've spotted 2 warning signs for SalMar you should know about.
Of course, you might also be able to find a better stock than SalMar. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About OB:SALM
SalMar
An aquaculture company, produces and sells farmed salmon in Asia, North America, Europe, and internationally.
High growth potential with proven track record.
