Recordati Industria Chimica e Farmaceutica S.p.A.'s (BIT:REC) Price In Tune With Earnings

When close to half the companies in Italy have price-to-earnings ratios (or "P/E's") below 16x, you may consider Recordati Industria Chimica e Farmaceutica S.p.A. (BIT:REC) as a stock to potentially avoid with its 24.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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Recordati Industria Chimica e Farmaceutica could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Recordati Industria Chimica e Farmaceutica

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Recordati Industria Chimica e Farmaceutica.

Is There Enough Growth For Recordati Industria Chimica e Farmaceutica?

There's an inherent assumption that a company should outperform the market for P/E ratios like Recordati Industria Chimica e Farmaceutica's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 4.3% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 23% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 19% per year during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 15% per year, which is noticeably less attractive.

In light of this, it's understandable that Recordati Industria Chimica e Farmaceutica'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 Bottom Line On Recordati Industria Chimica e Farmaceutica's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Recordati Industria Chimica e Farmaceutica 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 take the next step, you should know about the 3 warning signs for Recordati Industria Chimica e Farmaceutica (1 shouldn't be ignored!) that we have uncovered.

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.