What Interroll Holding AG's (VTX:INRN) P/E Is Not Telling You

Interroll Holding AG's (VTX:INRN) price-to-earnings (or "P/E") ratio of 30.7x 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 18x and even P/E's below 14x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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While the market has experienced earnings growth lately, Interroll Holding's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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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 steep as Interroll Holding's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 13%. This means it has also seen a slide in earnings over the longer-term as EPS is down 26% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 11% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 12% each year, which is not materially different.

With this information, we find it interesting that Interroll Holding is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Interroll Holding'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.

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

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Interroll Holding with six simple checks will allow you to discover any risks that could be an issue.

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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.