Unpleasant Surprises Could Be In Store For BELIMO Holding AG's (VTX:BEAN) Shares

BELIMO Holding AG's (VTX:BEAN) price-to-earnings (or "P/E") ratio of 48.5x might make it look like a strong sell right now compared to the market in Switzerland, where around half of the companies have P/E ratios below 20x 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 highly elevated P/E.

Recent times have been advantageous for BELIMO Holding as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for BELIMO Holding

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Is There Enough Growth For BELIMO Holding?

There's an inherent assumption that a company should far outperform the market for P/E ratios like BELIMO Holding's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. The strong recent performance means it was also able to grow EPS by 37% in total over the last three years. 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 6.4% each year during the coming three years according to the nine analysts following the company. That's shaping up to be materially lower than the 14% per annum growth forecast for the broader market.

In light of this, it's alarming that BELIMO Holding's P/E sits above the majority of other companies. 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 Final Word

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.

We've established that BELIMO Holding currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for BELIMO Holding you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.