Why Investors Shouldn't Be Surprised By Stadler Rail AG's (VTX:SRAIL) P/E

Stadler Rail AG's (VTX:SRAIL) price-to-earnings (or "P/E") ratio of 52.6x 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 13x are quite common. 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.

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Stadler Rail could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Stadler Rail

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

How Is Stadler Rail's Growth Trending?

Stadler Rail's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 69% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 71% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 83% per annum as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.9% per annum, which is noticeably less attractive.

With this information, we can see why Stadler Rail is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Stadler Rail'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. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Stadler Rail you should know about.

If you're unsure about the strength of Stadler Rail'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.