Investors Appear Satisfied With Davide Campari-Milano N.V.'s (BIT:CPR) Prospects

With a price-to-earnings (or "P/E") ratio of 32.9x Davide Campari-Milano N.V. (BIT:CPR) may be sending very bearish signals at the moment, given that almost half of all companies in Italy have P/E ratios under 14x and even P/E's lower than 8x are not unusual. 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.

With earnings growth that's inferior to most other companies of late, Davide Campari-Milano has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Davide Campari-Milano

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Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Davide Campari-Milano's to be considered reasonable.

Retrospectively, the last year delivered a decent 4.9% gain to the company's bottom line. The latest three year period has also seen an excellent 43% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 18% each year during the coming three years according to the analysts following the company. With the market only predicted to deliver 15% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Davide Campari-Milano's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Davide Campari-Milano's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Davide Campari-Milano'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. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Davide Campari-Milano you should be aware of.

If you're unsure about the strength of Davide Campari-Milano'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.