Recordati Industria Chimica e Farmaceutica S.p.A.'s (BIT:REC) Business Is Yet to Catch Up With Its Share Price

With a price-to-earnings (or "P/E") ratio of 26.7x Recordati Industria Chimica e Farmaceutica S.p.A. (BIT:REC) 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 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recordati Industria Chimica e Farmaceutica could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Recordati Industria Chimica e Farmaceutica

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Recordati Industria Chimica e Farmaceutica.

How Is Recordati Industria Chimica e Farmaceutica's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Recordati Industria Chimica e Farmaceutica's to be considered reasonable.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period was better as it's delivered a decent 6.4% overall rise in EPS. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 14% per annum over the next three years. That's shaping up to be materially lower than the 18% per annum growth forecast for the broader market.

With this information, we find it concerning that Recordati Industria Chimica e Farmaceutica is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Recordati Industria Chimica e Farmaceutica's P/E?

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 Recordati Industria Chimica e Farmaceutica's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Recordati Industria Chimica e Farmaceutica you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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