ALK-Abelló A/S' (CPH:ALK B) price-to-earnings (or "P/E") ratio of 67x might make it look like a strong sell right now compared to the market in Denmark, where around half of the companies have P/E ratios below 13x and even P/E's below 8x are quite common. 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.
ALK-Abelló certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for ALK-Abelló
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 ALK-Abelló's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings growth, the company posted a terrific increase of 197%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 44% each year as estimated by the six analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 13% per annum, which is noticeably less attractive.
In light of this, it's understandable that ALK-Abelló's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On ALK-Abelló's P/E
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of ALK-Abelló'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.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for ALK-Abelló with six simple checks on some of these key factors.
If you're unsure about the strength of ALK-Abelló's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
About CPSE:ALK B
ALK-Abelló
Operates as an allergy solutions company in Europe, North America, and internationally.
Flawless balance sheet with solid track record.
