Why Investors Shouldn't Be Surprised By H&R GmbH & Co. KGaA's (ETR:2HRA) 25% Share Price Surge

The H&R GmbH & Co. KGaA (ETR:2HRA) share price has done very well over the last month, posting an excellent gain of 25%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.

Since its price has surged higher, H&R GmbH KGaA may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 29.3x, since 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 so lofty.

While the market has experienced earnings growth lately, H&R GmbH KGaA's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for H&R GmbH KGaA

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

Is There Enough Growth For H&R GmbH KGaA?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 59%. This means it has also seen a slide in earnings over the longer-term as EPS is down 89% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 99% over the next year. With the market only predicted to deliver 19%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that H&R GmbH KGaA'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.

What We Can Learn From H&R GmbH KGaA's P/E?

H&R GmbH KGaA's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of H&R GmbH KGaA's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for H&R GmbH KGaA 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.