ARYZTA AG's (VTX:ARYN) P/E Still Appears To Be Reasonable

With a price-to-earnings (or "P/E") ratio of 24.2x ARYZTA AG (VTX:ARYN) may be sending bearish signals at the moment, given that almost half of all companies in Switzerland have P/E ratios under 21x and even P/E's lower than 13x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for ARYZTA 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as ARYZTA's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 20% per year over the next three years. That's shaping up to be materially higher than the 14% per year growth forecast for the broader market.

With this information, we can see why ARYZTA 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.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that ARYZTA maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - ARYZTA has 1 warning sign we think you should be aware of.

If you're unsure about the strength of ARYZTA'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.