Investors Appear Satisfied With SÜSS MicroTec SE's (ETR:SMHN) Prospects As Shares Rocket 27%

SÜSS MicroTec SE (ETR:SMHN) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The annual gain comes to 221% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 16x, you may consider SÜSS MicroTec as a stock to avoid entirely with its 42.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

SÜSS MicroTec could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for SÜSS MicroTec

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

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.1%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 79% 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 29% per year during the coming three years according to the eight analysts following the company. With the market only predicted to deliver 15% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that SÜSS MicroTec's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From SÜSS MicroTec's P/E?

SÜSS MicroTec's P/E is flying high just like its stock has during the last month. 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 SÜSS MicroTec'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.

It is also worth noting that we have found 1 warning sign for SÜSS MicroTec that you need to take into consideration.

You might be able to find a better investment than SÜSS MicroTec. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.