Why We're Not Concerned About Akzo Nobel N.V.'s (AMS:AKZA) Share Price

It's not a stretch to say that Akzo Nobel N.V.'s (AMS:AKZA) price-to-earnings (or "P/E") ratio of 18.3x right now seems quite "middle-of-the-road" compared to the market in the Netherlands, where the median P/E ratio is around 18x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's superior to most other companies of late, Akzo Nobel has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Akzo Nobel

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

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Akzo Nobel's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 93% last year. Still, incredibly EPS has fallen 24% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 10% per annum as estimated by the analysts watching the company. With the market predicted to deliver 12% growth per annum, the company is positioned for a comparable earnings result.

In light of this, it's understandable that Akzo Nobel's P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Akzo Nobel's analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Akzo Nobel (1 is a bit unpleasant!) that you should be aware of.

If you're unsure about the strength of Akzo Nobel'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.