What You Can Learn From Fresenius Medical Care AG's (ETR:FME) P/E

When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 17x, you may consider Fresenius Medical Care AG (ETR:FME) as a stock to potentially avoid with its 23.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Fresenius Medical Care hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Fresenius Medical Care

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

How Is Fresenius Medical Care's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 20% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 57% overall. 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 35% each year during the coming three years according to the analysts following the company. With the market only predicted to deliver 14% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Fresenius Medical Care'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

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Fresenius Medical Care maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Fresenius Medical Care that you should be aware of.

If you're unsure about the strength of Fresenius Medical Care'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.