Rheinmetall AG (ETR:RHM) Stocks Shoot Up 48% But Its P/E Still Looks Reasonable

Rheinmetall AG (ETR:RHM) shares have continued their recent momentum with a 48% gain in the last month alone. The last month tops off a massive increase of 189% in the last year.

Following the firm bounce in price, Rheinmetall may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 74.6x, since almost half of all companies in Germany have P/E ratios under 17x and even P/E's lower than 10x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Rheinmetall has been doing relatively well. 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.

See our latest analysis for Rheinmetall

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

Is There Enough Growth For Rheinmetall?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Rheinmetall's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 39%. The strong recent performance means it was also able to grow EPS by 105% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 45% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 15% per year, which is noticeably less attractive.

In light of this, it's understandable that Rheinmetall's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Rheinmetall's P/E?

Rheinmetall's P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Rheinmetall maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Rheinmetall that you need to be mindful of.

You might be able to find a better investment than Rheinmetall. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.