With The Lovesac Company (NASDAQ:LOVE) It Looks Like You'll Get What You Pay For

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider The Lovesac Company (NASDAQ:LOVE) as a stock to potentially avoid with its 21.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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While the market has experienced earnings growth lately, Lovesac's earnings have gone into reverse gear, which is not great. 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.

View our latest analysis for Lovesac

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

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

In order to justify its P/E ratio, Lovesac would need to produce impressive growth in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 8.4%. The last three years don't look nice either as the company has shrunk EPS by 69% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 24% each year as estimated by the six analysts watching the company. That's shaping up to be materially higher than the 10% per annum growth forecast for the broader market.

With this information, we can see why Lovesac 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.

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

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.

We've established that Lovesac 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. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 1 warning sign for Lovesac that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.