Risks To Shareholder Returns Are Elevated At These Prices For NKT A/S (CPH:NKT)

With a median price-to-earnings (or "P/E") ratio of close to 13x in Denmark, you could be forgiven for feeling indifferent about NKT A/S' (CPH:NKT) P/E ratio of 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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NKT certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for NKT

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

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

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

If we review the last year of earnings growth, the company posted a terrific increase of 94%. The strong recent performance means it was also able to grow EPS by 4,654% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 5.1% per year during the coming three years according to the seven analysts following the company. With the market predicted to deliver 16% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's curious that NKT's P/E sits in line with the majority of other companies. 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 Bottom Line On NKT's 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.

Our examination of NKT's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for NKT that we have uncovered.

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