Earnings Tell The Story For CeoTronics AG (FRA:CEK) As Its Stock Soars 31%

Despite an already strong run, CeoTronics AG (FRA:CEK) shares have been powering on, with a gain of 31% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 74% in the last year.

After such a large jump in price, given close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 15x, you may consider CeoTronics as a stock to avoid entirely with its 44.4x 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.

While the market has experienced earnings growth lately, CeoTronics' earnings have gone into reverse gear, which is not great. 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.

Check out our latest analysis for CeoTronics

Keen to find out how analysts think CeoTronics' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 53%. The last three years don't look nice either as the company has shrunk EPS by 51% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 50% per year over the next three years. With the market only predicted to deliver 16% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that CeoTronics' 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 CeoTronics' P/E?

Shares in CeoTronics have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that CeoTronics 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. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 7 warning signs for CeoTronics (2 are significant!) that you should be aware of before investing here.

You might be able to find a better investment than CeoTronics. 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.