Getting In Cheap On Watches of Switzerland Group plc (LON:WOSG) Might Be Difficult

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 18x, you may consider Watches of Switzerland Group plc (LON:WOSG) as a stock to avoid entirely with its 45.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Watches of Switzerland Group has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Is There Enough Growth For Watches of Switzerland Group?

Watches of Switzerland Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 94% gain to the company's bottom line. Pleasingly, EPS has also lifted 59% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 31% per annum as estimated by the six analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 13% each year, which is noticeably less attractive.

In light of this, it's understandable that Watches of Switzerland Group'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 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 Watches of Switzerland Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Watches of Switzerland Group, and understanding should be part of your investment process.

Of course, you might also be able to find a better stock than Watches of Switzerland Group. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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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.