What Topdanmark A/S' (CPH:TOP) P/E Is Not Telling You

When close to half the companies in Denmark have price-to-earnings ratios (or "P/E's") below 15x, you may consider Topdanmark A/S (CPH:TOP) as a stock to avoid entirely with its 24.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Topdanmark could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Topdanmark

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

Is There Enough Growth For Topdanmark?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 21%. The last three years don't look nice either as the company has shrunk EPS by 42% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the eight analysts watching the company. With the market predicted to deliver 17% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Topdanmark's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Bottom Line On Topdanmark's P/E

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 Topdanmark'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. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Topdanmark is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Topdanmark. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com