There's Reason For Concern Over Natural Grocers by Vitamin Cottage, Inc.'s (NYSE:NGVC) Massive 26% Price Jump

Natural Grocers by Vitamin Cottage, Inc. (NYSE:NGVC) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The last month tops off a massive increase of 195% in the last year.

Since its price has surged higher, Natural Grocers by Vitamin Cottage's price-to-earnings (or "P/E") ratio of 30.3x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. 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.

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

View our latest analysis for Natural Grocers by Vitamin Cottage

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?

Natural Grocers by Vitamin Cottage's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 35% last year. The latest three year period has also seen an excellent 38% 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 13% shows it's about the same on an annualised basis.

In light of this, it's curious that Natural Grocers by Vitamin Cottage's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Natural Grocers by Vitamin Cottage's P/E

Natural Grocers by Vitamin Cottage's P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Natural Grocers by Vitamin Cottage revealed its three-year earnings trends aren't impacting its high P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Natural Grocers by Vitamin Cottage with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.