With a price-to-earnings (or "P/E") ratio of 21.5x Lululemon Athletica Inc. (NASDAQ:LULU) may be sending 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 10x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Lululemon Athletica has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
NasdaqGS:LULU Price to Earnings Ratio vs Industry August 27th 2024 Want the full picture on analyst estimates for the company? Then our free report on Lululemon Athletica will help you uncover what's on the horizon.
Is There Enough Growth For Lululemon Athletica?
There's an inherent assumption that a company should outperform the market for P/E ratios like Lululemon Athletica's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 67% gain to the company's bottom line. Pleasingly, EPS has also lifted 134% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 13% per annum over the next three years. 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 Lululemon Athletica is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Lululemon Athletica maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.
A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Lululemon Athletica with six simple checks.
If you're unsure about the strength of Lululemon Athletica's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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