When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 18x, you may consider Wacker Chemie AG (ETR:WCH) as a stock to potentially avoid with its 23.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
With earnings growth that's superior to most other companies of late, Wacker Chemie has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Wacker Chemie
Does Growth Match The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like Wacker Chemie's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 9.1%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 90% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 18% each year as estimated by the analysts watching the company. With the market predicted to deliver 17% growth each year, the company is positioned for a comparable earnings result.
In light of this, it's curious that Wacker Chemie'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. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
The Key Takeaway
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.
We've established that Wacker Chemie currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
It is also worth noting that we have found 1 warning sign for Wacker Chemie that you need to take into consideration.
Of course, you might also be able to find a better stock than Wacker Chemie. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
Valuation is complex, but we're here to simplify it.
Discover if Wacker Chemie might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.