Why Investors Shouldn't Be Surprised By Levi Strauss & Co.'s (NYSE:LEVI) P/E

Levi Strauss & Co.'s (NYSE:LEVI) price-to-earnings (or "P/E") ratio of 57.7x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Levi Strauss as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, 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.

See our latest analysis for Levi Strauss

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

How Is Levi Strauss' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 67% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 50% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 72% per annum over the next three years. That's shaping up to be materially higher than the 10% each year growth forecast for the broader market.

In light of this, it's understandable that Levi Strauss' 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.

What We Can Learn From Levi Strauss' P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Levi Strauss' 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.

Before you settle on your opinion, we've discovered 3 warning signs for Levi Strauss that you should be aware of.

Of course, you might also be able to find a better stock than Levi Strauss. 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.