Getting In Cheap On H. Lundbeck A/S (CPH:HLUN A) Is Unlikely

H. Lundbeck A/S' (CPH:HLUN A) price-to-earnings (or "P/E") ratio of 31.6x 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 11x and even P/E's below 7x 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.

For example, consider that H. Lundbeck's financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for H. Lundbeck

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on H. Lundbeck will help you shine a light on its historical performance.

How Is H. Lundbeck's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like H. Lundbeck'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 47%. As a result, earnings from three years ago have also fallen 94% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 12% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that H. Lundbeck's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

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 H. Lundbeck currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware H. Lundbeck is showing 4 warning signs in our investment analysis, and 2 of those are potentially serious.

If you're unsure about the strength of H. Lundbeck'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.