Take Care Before Diving Into The Deep End On Continental Aktiengesellschaft (ETR:CON)

When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") above 19x, you may consider Continental Aktiengesellschaft (ETR:CON) as an attractive investment with its 12.8x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

We've discovered 1 warning sign about Continental. View them for free.

Recent times have been advantageous for Continental as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Continental

Keen to find out how analysts think Continental's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Continental's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 17%. The latest three year period has also seen a 8.3% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 22% per year over the next three years. With the market only predicted to deliver 17% per annum, the company is positioned for a stronger earnings result.

With this information, we find it odd that Continental is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Continental's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Continental currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for Continental that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.