Investors Still Waiting For A Pull Back In Jerónimo Martins, SGPS, S.A. (ELI:JMT)

When close to half the companies in Portugal have price-to-earnings ratios (or "P/E's") below 12x, you may consider Jerónimo Martins, SGPS, S.A. (ELI:JMT) as a stock to potentially avoid with its 16.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Jerónimo Martins SGPS hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Jerónimo Martins SGPS

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What Are Growth Metrics Telling Us About The High P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.6%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 66% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 8.3% per year as estimated by the analysts watching the company. With the market only predicted to deliver 2.9% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Jerónimo Martins SGPS 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 Bottom Line On Jerónimo Martins SGPS' P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Jerónimo Martins SGPS' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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 - Jerónimo Martins SGPS has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Jerónimo Martins SGPS' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.