Some Confidence Is Lacking In Kongsberg Gruppen ASA's (OB:KOG) P/E

When close to half the companies in Norway have price-to-earnings ratios (or "P/E's") below 10x, you may consider Kongsberg Gruppen ASA (OB:KOG) as a stock to avoid entirely with its 45x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Kongsberg Gruppen as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Kongsberg Gruppen

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

How Is Kongsberg Gruppen's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Kongsberg Gruppen's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 37%. Pleasingly, EPS has also lifted 141% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 17% per annum over the next three years. With the market predicted to deliver 18% growth per year, the company is positioned for a comparable earnings result.

In light of this, it's curious that Kongsberg Gruppen's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Kongsberg Gruppen's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Kongsberg Gruppen with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Kongsberg Gruppen, 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.