Dottikon ES Holding AG's (VTX:DESN) Business Is Yet to Catch Up With Its Share Price

With a price-to-earnings (or "P/E") ratio of 39.3x Dottikon ES Holding AG (VTX:DESN) may be sending very bearish signals at the moment, given that almost half of all companies in Switzerland have P/E ratios under 22x and even P/E's lower than 13x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Dottikon ES Holding could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Dottikon ES Holding would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 12%. Even so, admirably EPS has lifted 31% in aggregate from three years ago, notwithstanding the last 12 months. 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.

Looking ahead now, EPS is anticipated to climb by 8.5% per year during the coming three years according to the one analyst following the company. Meanwhile, the rest of the market is forecast to expand by 12% per year, which is noticeably more attractive.

In light of this, it's alarming that Dottikon ES Holding's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Dottikon ES 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 Dottikon ES Holding currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

If you're unsure about the strength of Dottikon ES Holding'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.