Unpleasant Surprises Could Be In Store For IMCD N.V.'s (AMS:IMCD) Shares

With a price-to-earnings (or "P/E") ratio of 27.4x IMCD N.V. (AMS:IMCD) may be sending very bearish signals at the moment, given that almost half of all companies in the Netherlands have P/E ratios under 16x and even P/E's lower than 10x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

IMCD could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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 IMCD

Keen to find out how analysts think IMCD's future stacks up against the industry? In that case, our free report is a great place to start.

How Is IMCD's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 6.6% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 130% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 6.2% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 16% each year growth forecast for the broader market.

With this information, we find it concerning that IMCD 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 IMCD'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.

Our examination of IMCD'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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for IMCD that you should be aware of.

If you're unsure about the strength of IMCD'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.