Market Participants Recognise Swiss Prime Site AG's (VTX:SPSN) Earnings

When close to half the companies in Switzerland have price-to-earnings ratios (or "P/E's") below 20x, you may consider Swiss Prime Site AG (VTX:SPSN) as a stock to avoid entirely with its 40.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Swiss Prime Site 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. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 7.8% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 69% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 27% each year over the next three years. That's shaping up to be materially higher than the 13% each year growth forecast for the broader market.

With this information, we can see why Swiss Prime Site 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

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Swiss Prime Site 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. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for Swiss Prime Site (1 is a bit concerning!) that you should be aware of.

If these risks are making you reconsider your opinion on Swiss Prime Site, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.