Vital Farms, Inc.'s (NASDAQ:VITL) Shares Climb 32% But Its Business Is Yet to Catch Up

Vital Farms, Inc. (NASDAQ:VITL) shareholders have had their patience rewarded with a 32% share price jump in the last month. The last month tops off a massive increase of 153% in the last year.

After such a large jump in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Vital Farms as a stock to avoid entirely with its 33.9x 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.

With earnings growth that's superior to most other companies of late, Vital Farms has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Vital Farms

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

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.

If we review the last year of earnings growth, the company posted a terrific increase of 136%. The latest three year period has also seen an excellent 701% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 1.1% during the coming year according to the six analysts following the company. Meanwhile, the rest of the market is forecast to expand by 15%, which is noticeably more attractive.

In light of this, it's alarming that Vital Farms' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Vital Farms' P/E?

The strong share price surge has got Vital Farms' P/E rushing to great heights as well. 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 Vital Farms currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Vital Farms that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.