SCHOTT Pharma AG & Co. KGaA (ETR:1SXP) Investors Are Less Pessimistic Than Expected

When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 16x, you may consider SCHOTT Pharma AG & Co. KGaA (ETR:1SXP) as a stock to potentially avoid with its 24x 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.

SCHOTT Pharma KGaA hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for SCHOTT Pharma KGaA

If you'd like to see what analysts are forecasting going forward, you should check out our free report on SCHOTT Pharma KGaA.

How Is SCHOTT Pharma KGaA's Growth Trending?

SCHOTT Pharma KGaA'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, dishearteningly the company's profits fell to the tune of 1.4%. Even so, admirably EPS has lifted 49% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 16% per year, which is not materially different.

With this information, we find it interesting that SCHOTT Pharma KGaA is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On SCHOTT Pharma KGaA's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that SCHOTT Pharma KGaA 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for SCHOTT Pharma KGaA with six simple checks will allow you to discover any risks that could be an issue.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.