When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 19x, you may consider Lovisa Holdings Limited (ASX:LOV) as a stock to avoid entirely with its 39.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Lovisa Holdings 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Lovisa Holdings

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

Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 19%. The latest three year period has also seen an excellent 222% 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.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 22% per year over the next three years. That's shaping up to be materially higher than the 19% per annum growth forecast for the broader market.

In light of this, it's understandable that Lovisa Holdings' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Lovisa Holdings' P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Lovisa Holdings' 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.

It is also worth noting that we have found 2 warning signs for Lovisa Holdings that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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