flatexDEGIRO AG's (ETR:FTK) 26% Price Boost Is Out Of Tune With Earnings

flatexDEGIRO AG (ETR:FTK) shareholders have had their patience rewarded with a 26% share price jump in the last month. The last month tops off a massive increase of 151% in the last year.

Since its price has surged higher, flatexDEGIRO's price-to-earnings (or "P/E") ratio of 25.2x 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 18x and even P/E's below 11x 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.

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With earnings growth that's superior to most other companies of late, flatexDEGIRO has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for flatexDEGIRO

If you'd like to see what analysts are forecasting going forward, you should check out our free report on flatexDEGIRO.

Is There Enough Growth For flatexDEGIRO?

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

If we review the last year of earnings growth, the company posted a terrific increase of 34%. Pleasingly, EPS has also lifted 66% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 14% as estimated by the ten analysts watching the company. With the market predicted to deliver 26% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that flatexDEGIRO's P/E sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On flatexDEGIRO's P/E

The large bounce in flatexDEGIRO's shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that flatexDEGIRO currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for flatexDEGIRO with six simple checks on some of these key factors.

If you're unsure about the strength of flatexDEGIRO's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.