Earnings Working Against Bavarian Nordic A/S' (CPH:BAVA) Share Price

When close to half the companies in Denmark have price-to-earnings ratios (or "P/E's") above 16x, you may consider Bavarian Nordic A/S (CPH:BAVA) as an attractive investment with its 10.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Bavarian Nordic certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Is There Any Growth For Bavarian Nordic?

In order to justify its P/E ratio, Bavarian Nordic would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 31% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to slump, contracting by 9.7% per annum during the coming three years according to the three analysts following the company. Meanwhile, the broader market is forecast to expand by 14% per annum, which paints a poor picture.

In light of this, it's understandable that Bavarian Nordic's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

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 Bavarian Nordic maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Bavarian Nordic, and understanding them should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.