Beiersdorf Aktiengesellschaft's (ETR:BEI) Price In Tune With Earnings

With a price-to-earnings (or "P/E") ratio of 41.9x Beiersdorf Aktiengesellschaft (ETR:BEI) may be sending very 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Beiersdorf hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Beiersdorf

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

Is There Enough Growth For Beiersdorf?

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

Retrospectively, the last year delivered a frustrating 2.5% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 33% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 18% per year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 12% per annum growth forecast for the broader market.

With this information, we can see why Beiersdorf is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Beiersdorf's 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.

As we suspected, our examination of Beiersdorf's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Beiersdorf with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Beiersdorf. 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com