With a price-to-earnings (or "P/E") ratio of 28.5x Ströer SE & Co. KGaA (ETR:SAX) may be sending very 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 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
While the market has experienced earnings growth lately, Ströer SE KGaA's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Ströer SE KGaA
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Ströer SE KGaA's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.9%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 65% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 31% per year during the coming three years according to the ten analysts following the company. With the market only predicted to deliver 15% per year, the company is positioned for a stronger earnings result.
With this information, we can see why Ströer SE KGaA 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
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.
As we suspected, our examination of Ströer SE KGaA'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. It's hard to see the share price falling strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 2 warning signs for Ströer SE KGaA you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.
About XTRA:SAX
Ströer SE KGaA
Provides out-of-home (OOH) media and online advertising solutions in Germany and internationally.
High growth potential average dividend payer.
