BASF SE (ETR: LOW) A price-to-earnings (or “P / E”) ratio of 29.8x could make it look like a sell-off right now compared to the German market, where around half of companies have P / E ratios below 22x and even P / E below 12x are quite common. However, it is not wise to just take the P / E at face value as there may be an explanation why it is high.

With earnings growth exceeding that of most other companies lately, BASF is doing relatively well. The P / E is likely high as investors believe this strong earnings performance will continue. You really hope so, otherwise you are paying a pretty high price for no particular reason.

Discover our latest analysis for BASF

Want a full picture of analyst estimates for the business? Then our free BASF report will help you find out what’s on the horizon.

Does growth match high P / E?

BASF’s P / E ratio would be typical of a company expected to generate solid growth and most importantly outperform the market.

If we look at the last year of profit growth, the company has posted a tremendous increase of 85%. Despite this recent strong growth, he’s still struggling to catch up as his three-year EPS has fallen frustratingly 63% overall. Therefore, it is fair to say that profit growth has recently been undesirable for the company.

As for the outlook, the next three years are expected to generate growth of 41% per year according to estimates from analysts watching the company. Meanwhile, the rest of the market is only expected to grow by 15% per year, which is significantly less attractive.

With this information we can see why BASF is trading at such a high P / E relative to the market. It appears that most investors expect this strong future growth and are prepared to pay more for the stock.

The key to take away

Using only the price-to-earnings ratio to determine if you should sell your stock isn’t good idea, but it can be a handy guide to the company’s future prospects.

As we suspected, our review of BASF’s analyst forecast revealed that its superior earnings outlook is contributing to its high P / E. At this point, investors believe that the potential for profit deterioration is not large enough to justify a lower price-to-earnings ratio. Unless these conditions change, they will continue to provide strong support for the share price.

It is always necessary to consider the ever-present specter of investment risk. We have identified 3 warning signs with BASF, and understanding them should be part of your investment process.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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