Market Cool On Vita Life Sciences Limited's (ASX:VLS) Earnings

With a price-to-earnings (or "P/E") ratio of 9.5x Vita Life Sciences Limited (ASX:VLS) may be sending bullish signals at the moment, given that almost half of all companies in Australia have P/E ratios greater than 18x and even P/E's higher than 33x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's exceedingly strong of late, Vita Life Sciences has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Vita Life Sciences

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We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Vita Life Sciences' earnings, revenue and cash flow.

Is There Any Growth For Vita Life Sciences?

The only time you'd be truly comfortable seeing a P/E as low as Vita Life Sciences' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 243%. Pleasingly, EPS has also lifted 105% 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 4.9% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Vita Life Sciences' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Vita Life Sciences' 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 Vita Life Sciences currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Vita Life Sciences (1 makes us a bit uncomfortable!) that you need to be mindful of.

Of course, you might also be able to find a better stock than Vita Life Sciences. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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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