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

It's not a stretch to say that BKW AG's (VTX:BKW) price-to-earnings (or "P/E") ratio of 18.7x right now seems quite "middle-of-the-road" compared to the market in Switzerland, where the median P/E ratio is around 20x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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BKW hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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Does Growth Match The P/E?

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

Retrospectively, the last year delivered a frustrating 8.1% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 176% overall rise in EPS, in spite of its unsatisfying short-term performance. 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.

Turning to the outlook, the next three years should generate growth of 7.1% per year as estimated by the four analysts watching the company. With the market predicted to deliver 11% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's curious that BKW's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Key Takeaway

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 BKW's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E 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 moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for BKW with six simple checks on some of these key factors.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.