Burckhardt Compression Holding AG's (VTX:BCHN) Business Is Yet to Catch Up With Its Share Price

With a price-to-earnings (or "P/E") ratio of 23.4x Burckhardt Compression Holding AG (VTX:BCHN) may be sending bearish signals at the moment, given that almost half of all companies in Switzerland have P/E ratios under 20x and even P/E's lower than 13x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Burckhardt Compression Holding certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Burckhardt Compression Holding

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What Are Growth Metrics Telling Us About The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 22%. The latest three year period has also seen an excellent 107% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 7.7% per annum during the coming three years according to the seven analysts following the company. That's shaping up to be materially lower than the 13% per annum growth forecast for the broader market.

With this information, we find it concerning that Burckhardt Compression Holding 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Burckhardt Compression Holding'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.

Having said that, be aware Burckhardt Compression Holding is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Burckhardt Compression Holding's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.