What AlzChem Group AG's (ETR:ACT) 29% Share Price Gain Is Not Telling You

Despite an already strong run, AlzChem Group AG (ETR:ACT) shares have been powering on, with a gain of 29% in the last thirty days. The last month tops off a massive increase of 176% in the last year.

After such a large jump in price, given around half the companies in Germany have price-to-earnings ratios (or "P/E's") below 18x, you may consider AlzChem Group as a stock to potentially avoid with its 21.7x 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 as high as it is.

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With earnings growth that's superior to most other companies of late, AlzChem Group has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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.

How Is AlzChem Group's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as AlzChem Group's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 44% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 106% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 14% per annum during the coming three years according to the five analysts following the company. That's shaping up to be similar to the 16% per annum growth forecast for the broader market.

In light of this, it's curious that AlzChem Group's 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. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

AlzChem Group shares have received a push in the right direction, but its P/E is elevated too. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of AlzChem Group's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for AlzChem Group that you should be aware of.

If you're unsure about the strength of AlzChem Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.