Why Investors Shouldn't Be Surprised By The Vita Coco Company, Inc.'s (NASDAQ:COCO) 27% Share Price Surge

The Vita Coco Company, Inc. (NASDAQ:COCO) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 29%.

Since its price has surged higher, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Vita Coco Company as a stock to avoid entirely with its 32x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

We've discovered 1 warning sign about Vita Coco Company. View them for free.

With earnings growth that's superior to most other companies of late, Vita Coco Company has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Vita Coco Company

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. The latest three year period has also seen an excellent 195% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 15% per year as estimated by the nine analysts watching the company. That's shaping up to be materially higher than the 10% each year growth forecast for the broader market.

With this information, we can see why Vita Coco Company 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.

What We Can Learn From Vita Coco Company's P/E?

Shares in Vita Coco Company have built up some good momentum lately, which has really inflated its 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.

We've established that Vita Coco Company maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Vita Coco Company you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.