Südwestdeutsche Salzwerke AG's (FRA:SSH) Share Price Could Signal Some Risk

When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 18x, you may consider Südwestdeutsche Salzwerke AG (FRA:SSH) as a stock to potentially avoid with its 22.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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As an illustration, earnings have deteriorated at Südwestdeutsche Salzwerke over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Südwestdeutsche Salzwerke

Although there are no analyst estimates available for Südwestdeutsche Salzwerke, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Südwestdeutsche Salzwerke?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 25%. The last three years don't look nice either as the company has shrunk EPS by 25% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Südwestdeutsche Salzwerke is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

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 Südwestdeutsche Salzwerke revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Südwestdeutsche Salzwerke has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Südwestdeutsche Salzwerke'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.