Why We're Not Concerned About Littelfuse, Inc.'s (NASDAQ:LFUS) Share Price

With a price-to-earnings (or "P/E") ratio of 29.8x Littelfuse, Inc. (NASDAQ:LFUS) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 11x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Littelfuse could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Littelfuse

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

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 37% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 34% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 24% per year as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 11% each year growth forecast for the broader market.

With this information, we can see why Littelfuse 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.

The Final Word

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 Littelfuse'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.

You always need to take note of risks, for example - Littelfuse has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Littelfuse's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.