Fewer Investors Than Expected Jumping On H. Lundbeck A/S (CPH:HLUN B)

With a price-to-earnings (or "P/E") ratio of 13.2x H. Lundbeck A/S (CPH:HLUN B) may be sending bullish signals at the moment, given that almost half of all companies in Denmark have P/E ratios greater than 16x and even P/E's higher than 25x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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With its earnings growth in positive territory compared to the declining earnings of most other companies, H. Lundbeck has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for H. Lundbeck

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How Is H. Lundbeck's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as H. Lundbeck's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 35%. The strong recent performance means it was also able to grow EPS by 182% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 9.2% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 11% each year, which is not materially different.

In light of this, it's peculiar that H. Lundbeck's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Key Takeaway

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.

We've established that H. Lundbeck currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for H. Lundbeck that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.