Siemens Healthineers AG's (ETR:SHL) Price Is Out Of Tune With Earnings

When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 16x, you may consider Siemens Healthineers AG (ETR:SHL) as a stock to avoid entirely with its 31.5x 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 so lofty.

Recent times have been advantageous for Siemens Healthineers 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 Siemens Healthineers

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

Is There Enough Growth For Siemens Healthineers?

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

Retrospectively, the last year delivered an exceptional 29% gain to the company's bottom line. As a result, it also grew EPS by 10% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 17% each year as estimated by the analysts watching the company. With the market predicted to deliver 16% growth each year, the company is positioned for a comparable earnings result.

In light of this, it's curious that Siemens Healthineers' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Siemens Healthineers' P/E

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 Siemens Healthineers currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Siemens Healthineers has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.