What ATOSS Software SE's (ETR:AOF) P/E Is Not Telling You

When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 17x, you may consider ATOSS Software SE (ETR:AOF) as a stock to avoid entirely with its 42.3x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

ATOSS Software certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for ATOSS Software

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

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

In order to justify its P/E ratio, ATOSS Software would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 135% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 9.4% per annum as estimated by the seven analysts watching the company. With the market predicted to deliver 16% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that ATOSS Software is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of ATOSS Software's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. 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. Our free balance sheet analysis for ATOSS Software with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than ATOSS Software. 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.