Recordati Industria Chimica e Farmaceutica S.p.A.'s (BIT:REC) Share Price Could Signal Some Risk

When close to half the companies in Italy have price-to-earnings ratios (or "P/E's") below 14x, you may consider Recordati Industria Chimica e Farmaceutica S.p.A. (BIT:REC) as a stock to avoid entirely with its 27x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been advantageous for Recordati Industria Chimica e Farmaceutica as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. 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

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.

Taking a look back first, we see that the company grew earnings per share by an impressive 25% last year. As a result, it also grew EPS by 9.6% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 11% per annum over the next three years. That's shaping up to be similar to the 13% per annum growth forecast for the broader market.

With this information, we find it interesting that Recordati Industria Chimica e Farmaceutica is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

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

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Recordati Industria Chimica e Farmaceutica's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 2 warning signs we've spotted with Recordati Industria Chimica e Farmaceutica.

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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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.