What You Can Learn From LifeVantage Corporation's (NASDAQ:LFVN) P/E After Its 26% Share Price Crash

To the annoyance of some shareholders, LifeVantage Corporation (NASDAQ:LFVN) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Looking at the bigger picture, even after this poor month the stock is up 92% in the last year.

Even after such a large drop in price, LifeVantage's price-to-earnings (or "P/E") ratio of 20x might still make it look like a 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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With earnings growth that's superior to most other companies of late, LifeVantage has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for LifeVantage

Want the full picture on analyst estimates for the company? Then our free report on LifeVantage will help you uncover what's on the horizon.

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

The only time you'd be truly comfortable seeing a P/E as high as LifeVantage's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 155%. However, this wasn't enough as the latest three year period has seen a very unpleasant 21% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 31% per annum during the coming three years according to the dual analysts following the company. With the market only predicted to deliver 10% each year, the company is positioned for a stronger earnings result.

With this information, we can see why LifeVantage 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 LifeVantage's P/E?

There's still some solid strength behind LifeVantage's P/E, if not its share price lately. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of LifeVantage's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Having said that, be aware LifeVantage is showing 1 warning sign in our investment analysis, you should know about.

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