Take Care Before Diving Into The Deep End On Grenke AG (ETR:GLJ)

Grenke AG's (ETR:GLJ) price-to-earnings (or "P/E") ratio of 12.4x might make it look like a buy right now compared to the market in Germany, where around half of the companies have P/E ratios above 17x and even P/E's above 35x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Grenke certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Grenke

Want the full picture on analyst estimates for the company? Then our free report on Grenke will help you uncover what's on the horizon.

Is There Any Growth For Grenke?

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

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 3.2% drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 23% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 14% per annum, which is noticeably less attractive.

With this information, we find it odd that Grenke is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Grenke's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Grenke (1 is potentially serious!) that you should be aware of before investing here.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.