What FLSmidth & Co. A/S' (CPH:FLS) 31% Share Price Gain Is Not Telling You

Those holding FLSmidth & Co. A/S (CPH:FLS) shares would be relieved that the share price has rebounded 31% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 5.5% over the last year.

Following the firm bounce in price, given around half the companies in Denmark have price-to-earnings ratios (or "P/E's") below 15x, you may consider FLSmidth as a stock to potentially avoid with its 20.8x 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.

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FLSmidth certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for FLSmidth

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

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

The only time you'd be truly comfortable seeing a P/E as high as FLSmidth's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 50%. The latest three year period has also seen an excellent 149% overall rise in EPS, aided by its short-term performance. 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 18% per year as estimated by the eight analysts watching the company. With the market predicted to deliver 17% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that FLSmidth is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On FLSmidth's P/E

The large bounce in FLSmidth's shares has lifted the company's P/E to a fairly high level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of FLSmidth's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for FLSmidth that you need to be mindful of.

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