Investors Appear Satisfied With Eli Lilly and Company's (NYSE:LLY) Prospects As Shares Rocket 30%

Despite an already strong run, Eli Lilly and Company (NYSE:LLY) shares have been powering on, with a gain of 30% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 42% in the last year.

Following the firm bounce in price, Eli Lilly's price-to-earnings (or "P/E") ratio of 52x 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 18x 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 highly elevated P/E.

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Eli Lilly certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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 Eli Lilly

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

How Is Eli Lilly's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 121%. The latest three year period has also seen an excellent 208% 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.

Turning to the outlook, the next three years should generate growth of 30% each year as estimated by the analysts watching the company. With the market only predicted to deliver 11% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Eli Lilly's 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.

The Key Takeaway

Eli Lilly's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Eli Lilly's 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. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Eli Lilly (1 is concerning) you should be aware 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.