AlzChem Group AG's (ETR:ACT) Shares Leap 26% Yet They're Still Not Telling The Full Story

AlzChem Group AG (ETR:ACT) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last month tops off a massive increase of 159% in the last year.

Even after such a large jump in price, AlzChem Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 12.2x, since almost half of all companies in Germany have P/E ratios greater than 17x and even P/E's higher than 30x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, AlzChem Group has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for AlzChem Group

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

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like AlzChem Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 67% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 80% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 16% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 15% per year, which is not materially different.

In light of this, it's peculiar that AlzChem Group's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

What We Can Learn From AlzChem Group's P/E?

Despite AlzChem Group's shares building up a head of steam, its P/E still lags most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that AlzChem Group currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Having said that, be aware AlzChem Group is showing 1 warning sign in our investment analysis, you should know about.

You might be able to find a better investment than AlzChem Group. 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.