DATAGROUP SE's (ETR:D6H) Shares Climb 27% But Its Business Is Yet to Catch Up

The DATAGROUP SE (ETR:D6H) share price has done very well over the last month, posting an excellent gain of 27%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.

Although its price has surged higher, you could still be forgiven for feeling indifferent about DATAGROUP's P/E ratio of 15.6x, since the median price-to-earnings (or "P/E") ratio in Germany is also close to 16x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

DATAGROUP hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Check out our latest analysis for DATAGROUP

Want the full picture on analyst estimates for the company? Then our free report on DATAGROUP will help you uncover what's on the horizon.

Is There Some Growth For DATAGROUP?

The only time you'd be comfortable seeing a P/E like DATAGROUP's is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 6.7%. Regardless, EPS has managed to lift by a handy 26% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 14% per year over the next three years. That's shaping up to be materially lower than the 16% each year growth forecast for the broader market.

With this information, we find it interesting that DATAGROUP is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Its shares have lifted substantially and now DATAGROUP's P/E is also back up to the market median. 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 DATAGROUP currently trades on a 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 moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for DATAGROUP you should be aware of.

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