Subdued Growth No Barrier To SGS SA's (VTX:SGSN) Price

SGS SA's (VTX:SGSN) price-to-earnings (or "P/E") ratio of 26.8x might make it look like a sell right now compared to the market in Switzerland, where around half of the companies have P/E ratios below 21x and even P/E's below 13x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

SGS could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for SGS

Keen to find out how analysts think SGS' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For SGS?

The only time you'd be truly comfortable seeing a P/E as high as SGS' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 4.9% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 17% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the analysts watching the company. That's shaping up to be similar to the 11% per annum growth forecast for the broader market.

With this information, we find it interesting that SGS is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On SGS' P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of SGS' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 2 warning signs for SGS that we have uncovered.

If these risks are making you reconsider your opinion on SGS, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.