Sensirion Holding AG's (VTX:SENS) Share Price Not Quite Adding Up

With a price-to-earnings (or "P/E") ratio of 42.5x Sensirion Holding AG (VTX:SENS) may be sending very bearish signals at the moment, given that almost half of all companies in Switzerland have P/E ratios under 18x and even P/E's lower than 12x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Sensirion Holding hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

See our latest analysis for Sensirion Holding

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

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered a frustrating 55% 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 172% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 3.6% each year during the coming three years according to the four analysts following the company. That's shaping up to be materially lower than the 8.7% per annum growth forecast for the broader market.

In light of this, it's alarming that Sensirion Holding's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Sensirion Holding's P/E?

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 Sensirion Holding's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near 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 high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Sensirion Holding you should be aware of, and 1 of them makes us a bit uncomfortable.

You might be able to find a better investment than Sensirion 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.