Some Shareholders Feeling Restless Over NH Hotel Group, S.A.'s (BME:NHH) P/E Ratio

With a median price-to-earnings (or "P/E") ratio of close to 16x in Spain, you could be forgiven for feeling indifferent about NH Hotel Group, S.A.'s (BME:NHH) P/E ratio of 14.3x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

NH Hotel Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

Is There Some Growth For NH Hotel Group?

There's an inherent assumption that a company should be matching the market for P/E ratios like NH Hotel Group's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. 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.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 3.9% over the next year. That's not great when the rest of the market is expected to grow by 14%.

In light of this, it's somewhat alarming that NH Hotel Group's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of NH Hotel Group's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for NH Hotel Group with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on NH Hotel Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.