dormakaba Holding AG's (VTX:DOKA) Price In Tune With Earnings

When close to half the companies in Switzerland have price-to-earnings ratios (or "P/E's") below 21x, you may consider dormakaba Holding AG (VTX:DOKA) as a stock to avoid entirely with its 62.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

dormakaba Holding hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

See our latest analysis for dormakaba Holding

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

How Is dormakaba Holding's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.7%. This means it has also seen a slide in earnings over the longer-term as EPS is down 58% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 52% per year as estimated by the eight analysts watching the company. With the market only predicted to deliver 13% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that dormakaba Holding's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of dormakaba Holding's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for dormakaba Holding that you need to be mindful of.

If you're unsure about the strength of dormakaba 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.