Coloplast A/S' (CPH:COLO B) Risks Elevated At These Prices

With a price-to-earnings (or "P/E") ratio of 56.1x Coloplast A/S (CPH:COLO B) may be sending very bearish signals at the moment, given that almost half of all companies in Denmark have P/E ratios under 17x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Coloplast's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Coloplast

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

How Is Coloplast's Growth Trending?

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

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Still, the latest three year period was better as it's delivered a decent 22% overall rise in EPS. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 17% per annum growth forecast for the broader market.

With this information, we find it concerning that Coloplast is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Coloplast's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Coloplast's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Coloplast with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Coloplast. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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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