Pinning Down H & M Hennes & Mauritz AB (publ)'s (STO:HM B) P/E Is Difficult Right Now

H & M Hennes & Mauritz AB (publ)'s (STO:HM B) price-to-earnings (or "P/E") ratio of 26.2x might make it look like a sell right now compared to the market in Sweden, where around half of the companies have P/E ratios below 23x and even P/E's below 15x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for H & M Hennes & Mauritz 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for H & M Hennes & Mauritz

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

Is There Enough Growth For H & M Hennes & Mauritz?

There's an inherent assumption that a company should outperform the market for P/E ratios like H & M Hennes & Mauritz's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 221%. The strong recent performance means it was also able to grow EPS by 91% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 17% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is not materially different.

With this information, we find it interesting that H & M Hennes & Mauritz 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. 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

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that H & M Hennes & Mauritz currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 1 warning sign for H & M Hennes & Mauritz you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.