Sonova Holding AG's (VTX:SOON) P/E Still Appears To Be Reasonable

Sonova Holding AG's (VTX:SOON) price-to-earnings (or "P/E") ratio of 26.8x might make it look like a 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 12x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Sonova Holding could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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How Is Sonova Holding's Growth Trending?

In order to justify its P/E ratio, Sonova Holding would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 4.7% 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 91% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 11% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 8.6% per annum, which is noticeably less attractive.

With this information, we can see why Sonova Holding 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 Bottom Line On Sonova Holding's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Sonova Holding 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.

It is also worth noting that we have found 1 warning sign for Sonova Holding that you need to take into consideration.

You might be able to find a better investment than Sonova Holding. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.