Earnings Not Telling The Story For Galenica AG (VTX:GALE)

With a median price-to-earnings (or "P/E") ratio of close to 22x in Switzerland, you could be forgiven for feeling indifferent about Galenica AG's (VTX:GALE) P/E ratio of 23.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been advantageous for Galenica as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Galenica

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Galenica.

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Galenica's to be considered reasonable.

Retrospectively, the last year delivered a decent 5.1% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 5.0% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 6.4% per annum during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to expand by 12% each year, which is noticeably more attractive.

With this information, we find it interesting that Galenica is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

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.

Our examination of Galenica's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Galenica that you need to be mindful of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com