Getting In Cheap On Infineon Technologies AG (ETR:IFX) Is Unlikely

When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 16x, you may consider Infineon Technologies AG (ETR:IFX) as a stock to potentially avoid with its 18.8x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Infineon Technologies could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Infineon Technologies

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

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered a frustrating 32% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 168% in total over the last three years. 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.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 5.1% over the next year. With the market predicted to deliver 21% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that Infineon Technologies is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Infineon Technologies' P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Infineon Technologies currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Infineon Technologies with six simple checks on some of these key factors.

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.