Sika AG's (VTX:SIKA) Share Price Not Quite Adding Up

Sika AG's (VTX:SIKA) price-to-earnings (or "P/E") ratio of 25.2x 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 13x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

We've discovered 1 warning sign about Sika. View them for free.

Sika certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Sika

Want the full picture on analyst estimates for the company? Then our free report on Sika will help you uncover what's on the horizon.

How Is Sika's Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 14%. EPS has also lifted 12% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 9.5% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 9.9% growth each year, the company is positioned for a comparable earnings result.

In light of this, it's curious that Sika's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Sika's P/E

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.

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

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

Of course, you might also be able to find a better stock than Sika. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.