There's Reason For Concern Over Coloplast A/S' (CPH:COLO B) Price

With a price-to-earnings (or "P/E") ratio of 42.4x 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 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 so lofty.

Recent times have been pleasing for Coloplast as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Coloplast

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

Is There Enough Growth For Coloplast?

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

Retrospectively, the last year delivered a decent 3.0% gain to the company's bottom line. The latest three year period has also seen a 8.6% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 13% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 15% 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. 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 Final Word

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.

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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 3 warning signs for Coloplast (1 is a bit unpleasant!) that you should be aware of.

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