Coloplast A/S' (CPH:COLO B) Price Is Out Of Tune With Earnings

With a price-to-earnings (or "P/E") ratio of 36.4x Coloplast A/S (CPH:COLO B) may be sending very bearish signals at the moment, given that almost half of all companies in Denmark have P/E ratios under 13x 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 so lofty.

Recent times haven't been advantageous for Coloplast as its earnings have been rising slower than most other companies. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Coloplast

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

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

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

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period was better as it's delivered a decent 7.8% overall rise in EPS. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 12% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 12% per annum, which is not materially different.

With this information, we find it interesting that Coloplast is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Coloplast's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Coloplast currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Coloplast has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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