Ambu A/S' (CPH:AMBU B) Price In Tune With Earnings

With a price-to-earnings (or "P/E") ratio of 37.7x Ambu A/S (CPH:AMBU B) may be sending very bearish signals at the moment, given that almost half of all companies in Denmark have P/E ratios under 16x and even P/E's lower than 11x are not unusual. 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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Ambu certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Ambu

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

How Is Ambu's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 159%. Pleasingly, EPS has also lifted 525% in aggregate from three years ago, thanks to the last 12 months of growth. 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 25% per year during the coming three years according to the seven analysts following the company. With the market only predicted to deliver 11% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Ambu's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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.

As we suspected, our examination of Ambu's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Ambu with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Ambu. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.