With a price-to-earnings (or "P/E") ratio of 46.5x Gelsenwasser AG (FRA:WWG) may be sending very bearish signals at the moment, given that almost half of all companies in Germany have P/E ratios under 21x and even P/E's lower than 11x 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.
The earnings growth achieved at Gelsenwasser over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
See our latest analysis for Gelsenwasser
Is There Enough Growth For Gelsenwasser?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Gelsenwasser's to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.6% last year. The solid recent performance means it was also able to grow EPS by 8.4% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 9.3% shows it's a great look while it lasts.
In light of this, it's understandable that Gelsenwasser's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.
What We Can Learn From Gelsenwasser's 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.
As we suspected, our examination of Gelsenwasser revealed its growing earnings over the medium-term are contributing to its high P/E, given the market is set to shrink. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. We still remain cautious about the company's ability to stay its recent course and swim against the current of the broader market turmoil. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.
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 Gelsenwasser with six simple checks.
Of course, you might also be able to find a better stock than Gelsenwasser. 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.
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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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About DB:WWG
Gelsenwasser
Engages in the water, wastewater, gas supply, and electricity businesses in Germany, the Czech Republic, and Poland.
Solid track record with excellent balance sheet.
