It's A Story Of Risk Vs Reward With Bayerische Motoren Werke Aktiengesellschaft (ETR:BMW)

With a price-to-earnings (or "P/E") ratio of 5.8x Bayerische Motoren Werke Aktiengesellschaft (ETR:BMW) may be sending very bullish signals at the moment, given that almost half of all companies in Germany have P/E ratios greater than 17x and even P/E's higher than 36x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Bayerische Motoren Werke over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Bayerische Motoren Werke

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How Is Bayerische Motoren Werke's Growth Trending?

In order to justify its P/E ratio, Bayerische Motoren Werke would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 35% 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 228% 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.

This is in contrast to the rest of the market, which is expected to grow by 9.5% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Bayerische Motoren Werke's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Bayerische Motoren Werke'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 Bayerische Motoren Werke revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

There are also other vital risk factors to consider and we've discovered 5 warning signs for Bayerische Motoren Werke (1 is potentially serious!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Bayerische Motoren Werke. 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.