HORNBACH Holding AG & Co. KGaA's (ETR:HBH) Earnings Are Not Doing Enough For Some Investors

HORNBACH Holding AG & Co. KGaA's (ETR:HBH) price-to-earnings (or "P/E") ratio of 8x might make it look like a strong buy right now compared to the market in Germany, where around half of the companies have P/E ratios above 18x and even P/E's above 32x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been pleasing for HORNBACH Holding KGaA as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for HORNBACH Holding KGaA

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, HORNBACH Holding KGaA would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 4.6% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 8.9% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 12% each year, which is noticeably more attractive.

In light of this, it's understandable that HORNBACH Holding KGaA's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From HORNBACH Holding 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.

As we suspected, our examination of HORNBACH Holding KGaA's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 1 warning sign for HORNBACH Holding KGaA that you should be aware of.

Of course, you might also be able to find a better stock than HORNBACH Holding 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.

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