Improved Earnings Required Before Regenbogen AG (FRA:RGB) Stock's 67% Jump Looks Justified

The Regenbogen AG (FRA:RGB) share price has done very well over the last month, posting an excellent gain of 67%. Looking back a bit further, it's encouraging to see the stock is up 33% in the last year.

Even after such a large jump in price, given about half the companies in Germany have price-to-earnings ratios (or "P/E's") above 20x, you may still consider Regenbogen as an attractive investment with its 12.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Earnings have risen firmly for Regenbogen recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Regenbogen

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Regenbogen will help you shine a light on its historical performance.

How Is Regenbogen's Growth Trending?

Regenbogen's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. Still, incredibly EPS has fallen 48% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 22% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Regenbogen is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

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

Despite Regenbogen's shares building up a head of steam, its P/E still lags most other companies. 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 Regenbogen maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 4 warning signs we've spotted with Regenbogen (including 2 which are a bit unpleasant).

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.