Why Investors Shouldn't Be Surprised By M1 Kliniken AG's (ETR:M12) 25% Share Price Surge

Despite an already strong run, M1 Kliniken AG (ETR:M12) shares have been powering on, with a gain of 25% in the last thirty days. The last 30 days bring the annual gain to a very sharp 77%.

Following the firm bounce in price, M1 Kliniken's price-to-earnings (or "P/E") ratio of 37.2x might make it look like a strong sell right now compared to the market in Germany, where around half of the companies have P/E ratios below 15x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times haven't been advantageous for M1 Kliniken as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for M1 Kliniken

Keen to find out how analysts think M1 Kliniken's future stacks up against the industry? In that case, our free report is a great place to start.

How Is M1 Kliniken's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as M1 Kliniken's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 9.4% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 27% per year as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 13% each year growth forecast for the broader market.

In light of this, it's understandable that M1 Kliniken's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On M1 Kliniken's P/E

M1 Kliniken's P/E is flying high just like its stock has during the last month. 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.

We've established that M1 Kliniken maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for M1 Kliniken with six simple checks on some of these key factors.

You might be able to find a better investment than M1 Kliniken. 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.