Getting In Cheap On Fresenius SE & Co. KGaA (ETR:FRE) Might Be Difficult

With a price-to-earnings (or "P/E") ratio of 24.5x Fresenius SE & Co. KGaA (ETR:FRE) may be sending bearish signals at the moment, given that almost half of all companies in Germany have P/E ratios under 17x and even P/E's lower than 10x 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 as high as it is.

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Recent times have been advantageous for Fresenius SE KGaA as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Fresenius SE KGaA

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How Is Fresenius SE KGaA's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 25%. However, this wasn't enough as the latest three year period has seen a very unpleasant 25% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 28% each year as estimated by the analysts watching the company. With the market only predicted to deliver 17% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Fresenius 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

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.

We've established that Fresenius SE KGaA 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. It's hard to see the share price falling strongly in the near future under these circumstances.

You need to take note of risks, for example - Fresenius SE KGaA has 2 warning signs (and 1 which is significant) we think you should know about.

You might be able to find a better investment than Fresenius SE KGaA. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.