Cautious Investors Not Rewarding KWS SAAT SE & Co. KGaA's (ETR:KWS) Performance Completely

Explore KWS SAAT SE KGaA's Fair Values from the Community and select yours

With a price-to-earnings (or "P/E") ratio of 13.3x KWS SAAT SE & Co. KGaA (ETR:KWS) may be sending bullish signals at the moment, given that almost half of all companies in Germany have P/E ratios greater than 20x and even P/E's higher than 39x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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KWS SAAT SE KGaA hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for KWS SAAT SE KGaA

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Is There Any Growth For KWS SAAT SE KGaA?

There's an inherent assumption that a company should underperform the market for P/E ratios like KWS SAAT SE KGaA's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 15%. Still, the latest three year period has seen an excellent 44% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 26% as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 23% growth forecast for the broader market.

In light of this, it's peculiar that KWS SAAT SE KGaA's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From KWS SAAT SE KGaA's P/E?

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.

Our examination of KWS SAAT SE KGaA'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. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for KWS SAAT SE KGaA with six simple checks.

If you're unsure about the strength of KWS SAAT SE KGaA'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.