A Piece Of The Puzzle Missing From The Lovesac Company's (NASDAQ:LOVE) 29% Share Price Climb

The Lovesac Company (NASDAQ:LOVE) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 33% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Lovesac's price-to-earnings (or "P/E") ratio of 18.3x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 17x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings that are retreating more than the market's of late, Lovesac has been very sluggish. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Lovesac

Keen to find out how analysts think Lovesac's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Lovesac's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Lovesac's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 10% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 53% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 27% each year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 10.0% per year, which is noticeably less attractive.

With this information, we find it interesting that Lovesac is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What We Can Learn From Lovesac's P/E?

Its shares have lifted substantially and now Lovesac's P/E is also back up to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Lovesac's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Lovesac with six simple checks.

You might be able to find a better investment than Lovesac. 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.