When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 15x, you may consider PharmaSGP Holding SE (ETR:PSG) as a stock to avoid entirely with its 28.9x P/E ratio. 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 PharmaSGP Holding 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. If not, then existing shareholders might be a little nervous about the viability of the share price.
View our latest analysis for PharmaSGP Holding
Want the full picture on analyst estimates for the company? Then our free report on PharmaSGP Holding will help you uncover what's on the horizon.
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as PharmaSGP Holding's is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 32% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 34% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 16% per annum during the coming three years according to the twin analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 13% each year, which is noticeably less attractive.
With this information, we can see why PharmaSGP Holding is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From PharmaSGP Holding's P/E?
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 PharmaSGP Holding 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. Unless these conditions change, they will continue to provide strong support to the share price.
Before you settle on your opinion, we've discovered 1 warning sign for PharmaSGP Holding that you should be aware of.
Of course, you might also be able to find a better stock than PharmaSGP Holding. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.