The Price Is Right For Genmab A/S (CPH:GMAB)

With a price-to-earnings (or "P/E") ratio of 20.2x Genmab A/S (CPH:GMAB) may be sending bearish signals at the moment, given that almost half of all companies in Denmark have P/E ratios under 15x and even P/E's lower than 7x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Genmab's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Genmab

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

Is There Enough Growth For Genmab?

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

Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. Pleasingly, EPS has also lifted 127% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 19% each year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 14% per annum growth forecast for the broader market.

In light of this, it's understandable that Genmab'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 Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Genmab'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. It's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Genmab with six simple checks on some of these key factors.

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