Vital Farms, Inc.'s (NASDAQ:VITL) P/E Is Still On The Mark Following 30% Share Price Bounce

Vital Farms, Inc. (NASDAQ:VITL) shareholders have had their patience rewarded with a 30% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 54%.

Following the firm bounce in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Vital Farms as a stock to avoid entirely with its 41.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Vital Farms could be doing better as it's been growing earnings less than most other companies lately. It might be that many expect the uninspiring earnings performance to recover significantly, 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 Vital Farms

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

Is There Enough Growth For Vital Farms?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.4% last year. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 22% each year during the coming three years according to the eleven analysts following the company. That's shaping up to be materially higher than the 11% per annum growth forecast for the broader market.

In light of this, it's understandable that Vital Farms' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Shares in Vital Farms have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Vital Farms 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Vital Farms (1 is concerning!) that you need to be mindful of.

You might be able to find a better investment than Vital Farms. 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.