What You Can Learn From Watches of Switzerland Group PLC's (LON:WOSG) P/E After Its 27% Share Price Crash

To the annoyance of some shareholders, Watches of Switzerland Group PLC (LON:WOSG) shares are down a considerable 27% in the last month, which continues a horrid run for the company. The recent drop has obliterated the annual return, with the share price now down 9.0% over that longer period.

Although its price has dipped substantially, given around half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 14x, you may still consider Watches of Switzerland Group as a stock to potentially avoid with its 19.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Watches of Switzerland Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Watches of Switzerland Group

Want the full picture on analyst estimates for the company? Then our free report on Watches of Switzerland Group will help you uncover what's on the horizon.

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 solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 61%. The last three years don't look nice either as the company has shrunk EPS by 44% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 43% per annum as estimated by the ten analysts watching the company. That's shaping up to be materially higher than the 16% per annum growth forecast for the broader market.

With this information, we can see why Watches of Switzerland Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Watches of Switzerland Group's P/E hasn't come down all the way after its stock plunged. 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.

As we suspected, our examination of Watches of Switzerland Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for Watches of Switzerland Group that you need to take into consideration.

You might be able to find a better investment than Watches of Switzerland Group. 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.