Why We're Not Concerned About SalMar ASA's (OB:SALM) Share Price

When close to half the companies in Norway have price-to-earnings ratios (or "P/E's") below 12x, you may consider SalMar ASA (OB:SALM) as a stock to avoid entirely with its 30.7x 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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SalMar could be doing better as it's been growing earnings less than most other companies lately. It might be that many expect the uninspiring earnings performance to recover significantly, 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.

View our latest analysis for SalMar

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

How Is SalMar's Growth Trending?

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 worthy increase of 3.1%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 47% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 42% per year during the coming three years according to the eight analysts following the company. With the market only predicted to deliver 18% each year, the company is positioned for a stronger earnings result.

With this information, we can see why SalMar is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On SalMar'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.

As we suspected, our examination of SalMar'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. It's hard to see the share price falling strongly in the near future under these circumstances.

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.

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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.