On Holding AG (NYSE:ONON) Stocks Shoot Up 41% But Its P/E Still Looks Reasonable

On Holding AG (NYSE:ONON) shareholders would be excited to see that the share price has had a great month, posting a 41% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 64%.

Since its price has surged higher, On Holding's price-to-earnings (or "P/E") ratio of 78.5x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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On Holding certainly has been doing a good job lately as it's been growing earnings more 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 On Holding

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Is There Enough Growth For On Holding?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 62% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 36% per annum over the next three years. That's shaping up to be materially higher than the 10% per year growth forecast for the broader market.

In light of this, it's understandable that On Holding'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.

The Final Word

Shares in On Holding have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that On Holding maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for On Holding with six simple checks.

If these risks are making you reconsider your opinion on On Holding, 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.