BASF SE (ETR:BAS) Looks Just Right

BASF SE's (ETR:BAS) price-to-earnings (or "P/E") ratio of 29.8x might make it look like a sell right now compared to the market in Germany, where around half of the companies have P/E ratios below 22x and even P/E's below 12x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

With earnings growth that's superior to most other companies of late, BASF has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for BASF

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Does Growth Match The High P/E?

BASF's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 85%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 63% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 41% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 15% per annum, which is noticeably less attractive.

With this information, we can see why BASF 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.

The Key Takeaway

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.

As we suspected, our examination of BASF'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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with BASF, and understanding these should be part of your investment process.

If you're unsure about the strength of BASF'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.
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