Getting In Cheap On Royal Unibrew A/S (CPH:RBREW) Is Unlikely

With a price-to-earnings (or "P/E") ratio of 20.2x Royal Unibrew A/S (CPH:RBREW) may be sending bearish signals at the moment, given that almost half of all companies in Denmark have P/E ratios under 14x and even P/E's lower than 7x are not unusual. 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.

Recent times haven't been advantageous for Royal Unibrew as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Royal Unibrew

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

Is There Enough Growth For Royal Unibrew?

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

Retrospectively, the last year delivered a frustrating 4.8% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 9.2% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 12% per year as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 15% per year, which is noticeably more attractive.

In light of this, it's alarming that Royal Unibrew's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

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 Royal Unibrew's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Royal Unibrew, and understanding them should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.