Pinning Down Knorr-Bremse AG's (ETR:KBX) P/E Is Difficult Right Now

When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 16x, you may consider Knorr-Bremse AG (ETR:KBX) as a stock to potentially avoid with its 19.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Knorr-Bremse certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Knorr-Bremse

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

How Is Knorr-Bremse's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Knorr-Bremse's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 10% per annum during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to expand by 15% per annum, which is noticeably more attractive.

With this information, we find it concerning that Knorr-Bremse is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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 Knorr-Bremse's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near 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 high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Knorr-Bremse.

Of course, you might also be able to find a better stock than Knorr-Bremse. 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.