Pinning Down CTS Eventim AG & Co. KGaA's (ETR:EVD) P/E Is Difficult Right Now

With a price-to-earnings (or "P/E") ratio of 21.6x CTS Eventim AG & Co. KGaA (ETR:EVD) may be sending bearish signals at the moment, given that almost half of all companies in Germany have P/E ratios under 16x and even P/E's lower than 9x 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 as high as it is.

With its earnings growth in positive territory compared to the declining earnings of most other companies, CTS Eventim KGaA has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

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How Is CTS Eventim KGaA's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 49%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.6% per year as estimated by the ten analysts watching the company. With the market predicted to deliver 13% growth per annum, that's a disappointing outcome.

In light of this, it's alarming that CTS Eventim KGaA's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

What We Can Learn From CTS Eventim KGaA's P/E?

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 CTS Eventim KGaA currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

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

Of course, you might also be able to find a better stock than CTS Eventim KGaA. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.