Why We're Not Concerned Yet About Limbach Holdings, Inc.'s (NASDAQ:LMB) 28% Share Price Plunge

Limbach Holdings, Inc. (NASDAQ:LMB) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. Looking at the bigger picture, even after this poor month the stock is up 42% in the last year.

Even after such a large drop in price, Limbach Holdings may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 31.2x, since almost half of all companies in the United States have P/E ratios under 17x and even P/E's lower than 10x are not unusual. 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.

With earnings growth that's superior to most other companies of late, Limbach Holdings has been doing relatively well. 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.

View our latest analysis for Limbach Holdings

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

In order to justify its P/E ratio, Limbach Holdings would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 29% gain to the company's bottom line. Pleasingly, EPS has also lifted 678% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 23% each year during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 11% per year growth forecast for the broader market.

In light of this, it's understandable that Limbach Holdings' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Limbach Holdings' shares may have retreated, but its P/E is still flying high. 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 Limbach Holdings 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. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Limbach Holdings with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Limbach Holdings. 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.