2G Energy AG's (ETR:2GB) Shares Climb 30% But Its Business Is Yet to Catch Up

2G Energy AG (ETR:2GB) shares have had a really impressive month, gaining 30% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 65%.

Following the firm bounce in price, 2G Energy may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 26x, since almost half of all companies in Germany have P/E ratios under 18x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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2G Energy certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for 2G Energy

Although there are no analyst estimates available for 2G Energy, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, 2G Energy would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 32% gain to the company's bottom line. Pleasingly, EPS has also lifted 89% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised earnings results.

With this information, we find it interesting that 2G Energy is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From 2G Energy's P/E?

2G Energy shares have received a push in the right direction, but its P/E is elevated too. 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.

Our examination of 2G Energy revealed its three-year earnings trends aren't impacting its high P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for 2G Energy with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on 2G Energy, 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.