With Vital Farms, Inc. (NASDAQ:VITL) It Looks Like You'll Get What You Pay For
With a price-to-earnings (or "P/E") ratio of 78.8x Vital Farms, Inc. (NASDAQ:VITL) 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 21x and even P/E's lower than 12x 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.
Recent times have been advantageous for Vital Farms as its earnings have been rising faster than most other companies. 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?
In order to justify its P/E ratio, Vital Farms would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 232%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 21% per annum over the next three years. That's shaping up to be materially higher than the 16% per annum growth forecast for the broader market.
In light of this, it's understandable that Vital Farms' 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 Bottom Line On Vital Farms' P/E
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.
We've established that Vital Farms maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.
A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Vital Farms with six simple checks on some of these key factors.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.
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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