Vossloh AG's (ETR:VOS) 33% Share Price Surge Not Quite Adding Up

Vossloh AG (ETR:VOS) shares have continued their recent momentum with a 33% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 56% in the last year.

After such a large jump in price, Vossloh's price-to-earnings (or "P/E") ratio of 22x might make it look like a sell right now compared to the market in Germany, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's superior to most other companies of late, Vossloh has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Vossloh's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 42% gain to the company's bottom line. The latest three year period has also seen an excellent 58% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 3.0% over the next year. With the market predicted to deliver 19% growth , that's a disappointing outcome.

In light of this, it's alarming that Vossloh's P/E sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Final Word

Vossloh shares have received a push in the right direction, but its P/E is elevated too. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Vossloh currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Vossloh you should be aware of.

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