With a price-to-earnings (or "P/E") ratio of 35.9x Cancom SE (ETR:COK) may be sending very bearish signals at the moment, given that almost half of all companies in Germany have P/E ratios under 16x and even P/E's lower than 9x are not unusual. 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.
With earnings that are retreating more than the market's of late, Cancom has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Cancom
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as Cancom's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 112% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 30% per annum over the next three years. With the market only predicted to deliver 14% per year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Cancom'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.
The Bottom Line On Cancom's P/E
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.
We've established that Cancom maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Cancom, and understanding these should be part of your investment process.
You might be able to find a better investment than Cancom. 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).
If you're looking to trade Cancom, open an account with the lowest-cost platform trusted by professionals, Interactive Brokers.
With clients in over 200 countries and territories, and access to 160 markets, IBKR lets you trade stocks, options, futures, forex, bonds and funds from a single integrated account.
Enjoy no hidden fees, no account minimums, and FX conversion rates as low as 0.03%, far better than what most brokers offer.
Sponsored ContentNew: AI Stock Screener & Alerts
Our new AI Stock Screener scans the market every day to uncover opportunities.
• Dividend Powerhouses (3%+ Yield)
• Undervalued Small Caps with Insider Buying
• High growth Tech and AI Companies
Or build your own from over 50 metrics.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About XTRA:COK
Cancom
Provides information technology services in Germany and internationally.
Solid track record with excellent balance sheet and pays a dividend.