When close to half the companies in Switzerland have price-to-earnings ratios (or "P/E's") below 18x, you may consider SGS SA (VTX:SGSN) as a stock to potentially avoid with its 22.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
SGS hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.
See our latest analysis for SGS
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as SGS' is when the company's growth is on track to outshine the market.
Retrospectively, the last year delivered a frustrating 4.0% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 31% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 12% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 8.7% per annum, which is noticeably less attractive.
With this information, we can see why SGS is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
What We Can Learn From SGS' P/E?
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of SGS' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
We don't want to rain on the parade too much, but we did also find 2 warning signs for SGS that you need to be mindful of.
If you're unsure about the strength of SGS' 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.
About SWX:SGSN
SGS
Provides inspection, testing, and verification services in Europe, Africa, the Middle East, the Americas, and the Asia Pacific.
Reasonable growth potential average dividend payer.
