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When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Natural Grocers by Vitamin Cottage, Inc. (NYSE:NGVC) as a stock to potentially avoid with its 23.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
Natural Grocers by Vitamin Cottage certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
How Does Natural Grocers by Vitamin Cottage's P/E Ratio Compare To Its Industry Peers?
We'd like to see if P/E's within Natural Grocers by Vitamin Cottage's industry might provide some colour around the company's high P/E ratio. It turns out the Consumer Retailing industry in general also has a P/E ratio higher than the market, as the graphic below shows. So it appears the company's ratio could be influenced considerably by these industry numbers currently. Some industry P/E's don't move around a lot and right now most companies within the Consumer Retailing industry should be getting a boost. We'd highlight though, the spotlight should be on the anticipated direction of the company's earnings.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Natural Grocers by Vitamin Cottage will help you shine a light on its historical performance.
How Is Natural Grocers by Vitamin Cottage's Growth Trending?
In order to justify its P/E ratio, Natural Grocers by Vitamin Cottage would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered an exceptional 47% gain to the company's bottom line. Pleasingly, EPS has also lifted 62% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
In contrast to the company, the rest of the market is expected to decline by 11% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.
In light of this, it's understandable that Natural Grocers by Vitamin Cottage's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.
What We Can Learn From Natural Grocers by Vitamin Cottage's P/E?
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Natural Grocers by Vitamin Cottage maintains its high P/E on the strength of its recentthree-year growth beating forecasts for a struggling market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.
Before you take the next step, you should know about the 3 warning signs for Natural Grocers by Vitamin Cottage (1 is significant!) that we have uncovered.
You might be able to find a better investment than Natural Grocers by Vitamin Cottage. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
This article by Simply Wall St is general in nature. 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.
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