Shareholders Should Be Pleased With Demant A/S' (CPH:DEMANT) Price

With a price-to-earnings (or "P/E") ratio of 24.3x Demant A/S (CPH:DEMANT) 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's inferior to most other companies of late, Demant has been relatively sluggish. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Demant

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

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

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

Retrospectively, the last year delivered a decent 3.1% gain to the company's bottom line. EPS has also lifted 26% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 17% per annum over the next three years. With the market only predicted to deliver 13% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Demant's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Demant's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with Demant.

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