What GEA Group Aktiengesellschaft's (ETR:G1A) P/E Is Not Telling You

With a median price-to-earnings (or "P/E") ratio of close to 17x in Germany, you could be forgiven for feeling indifferent about GEA Group Aktiengesellschaft's (ETR:G1A) P/E ratio of 16.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

GEA Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for GEA Group

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How Is GEA Group's Growth Trending?

In order to justify its P/E ratio, GEA Group would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a worthy increase of 10%. This was backed up an excellent period prior to see EPS up by 283% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 6.1% each year during the coming three years according to the twelve analysts following the company. Meanwhile, the rest of the market is forecast to expand by 13% per annum, which is noticeably more attractive.

With this information, we find it interesting that GEA Group is trading at a fairly similar P/E to the market. 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 Bottom Line On GEA Group'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.

Our examination of GEA Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware GEA Group is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than GEA Group. 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.