Recordati Industria Chimica e Farmaceutica S.p.A. (BIT:REC) Not Flying Under The Radar

Recordati Industria Chimica e Farmaceutica S.p.A.'s (BIT:REC) price-to-earnings (or "P/E") ratio of 28.1x might make it look like a strong sell right now compared to the market in Italy, where around half of the companies have P/E ratios below 13x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

While the market has experienced earnings growth lately, Recordati Industria Chimica e Farmaceutica's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Recordati Industria Chimica e Farmaceutica

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Is There Enough Growth For Recordati Industria Chimica e Farmaceutica?

The only time you'd be truly comfortable seeing a P/E as steep as Recordati Industria Chimica e Farmaceutica's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Fortunately, a few good years before that means that it was still able to grow EPS by 6.8% in total over the last three years. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 17% each year as estimated by the nine analysts watching the company. With the market only predicted to deliver 14% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Recordati Industria Chimica e Farmaceutica is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

As we suspected, our examination of Recordati Industria Chimica e Farmaceutica'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 Recordati Industria Chimica e Farmaceutica that you need to take into consideration.

If these risks are making you reconsider your opinion on Recordati Industria Chimica e Farmaceutica, 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.