freenet AG's (ETR:FNTN) P/E Is On The Mark

When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 17x, you may consider freenet AG (ETR:FNTN) as a stock to potentially avoid with its 20x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

freenet certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for freenet

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

Is There Enough Growth For freenet?

In order to justify its P/E ratio, freenet would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 95% last year. Still, incredibly EPS has fallen 15% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 24% per annum during the coming three years according to the twelve analysts following the company. With the market only predicted to deliver 13% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that freenet'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 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.

We've established that freenet 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for freenet that you should be aware of.

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