CompuGroup Medical SE & Co. KGaA's (ETR:COP) Popularity With Investors Is Clear

When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 15x, you may consider CompuGroup Medical SE & Co. KGaA (ETR:COP) as a stock to avoid entirely with its 23.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

While the market has experienced earnings growth lately, CompuGroup Medical SE KGaA's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For CompuGroup Medical SE KGaA?

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

Retrospectively, the last year delivered a frustrating 63% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 54% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 32% per year during the coming three years according to the nine analysts following the company. That's shaping up to be materially higher than the 14% each year growth forecast for the broader market.

In light of this, it's understandable that CompuGroup Medical SE KGaA's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of CompuGroup Medical SE KGaA's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 3 warning signs we've spotted with CompuGroup Medical SE KGaA (including 1 which can't be ignored).

If you're unsure about the strength of CompuGroup Medical 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.