Shareholders Should Be Pleased With Subsea 7 S.A.'s (OB:SUBC) Price

With a price-to-earnings (or "P/E") ratio of 47.1x Subsea 7 S.A. (OB:SUBC) may be sending very bearish signals at the moment, given that almost half of all companies in Norway have P/E ratios under 11x and even P/E's lower than 6x 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.

Recent times have been advantageous for Subsea 7 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.

View our latest analysis for Subsea 7

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Subsea 7.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Subsea 7's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 246% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 78% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 25% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Subsea 7's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Subsea 7'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.

We've established that Subsea 7 maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Subsea 7 that you should be aware of.

If you're unsure about the strength of Subsea 7'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.