SCHOTT Pharma AG & Co. KGaA's (ETR:1SXP) Business Is Trailing The Market But Its Shares Aren't

SCHOTT Pharma AG & Co. KGaA's (ETR:1SXP) price-to-earnings (or "P/E") ratio of 31.5x might make it look like a strong sell right now compared to the market in Germany, where around half of the companies have P/E ratios below 16x and even P/E's below 10x 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 so lofty.

SCHOTT Pharma KGaA's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for SCHOTT Pharma KGaA

Keen to find out how analysts think SCHOTT Pharma KGaA's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For SCHOTT Pharma KGaA?

There's an inherent assumption that a company should far outperform the market for P/E ratios like SCHOTT Pharma KGaA's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 5.1% last year. Pleasingly, EPS has also lifted 49% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 16% each year as estimated by the ten analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 15% each 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 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.

Our examination of SCHOTT Pharma KGaA's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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.

A lot of potential risks can sit within a company's balance sheet. 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 you're unsure about the strength of SCHOTT Pharma KGaA'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.