Yahoo Finance Holland Colours N.V. (AMS:HOLCO) Investors Are Less Pessimistic Than Expected
With a price-to-earnings (or "P/E") ratio of 19.2x Holland Colours N.V. (AMS:HOLCO) may be sending bearish signals at the moment, given that almost half of all companies in the Netherlands have P/E ratios under 16x and even P/E's lower than 7x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
For instance, Holland Colours' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Holland Colours
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Holland Colours' earnings, revenue and cash flow.
Does Growth Match The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like Holland Colours' to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 51%. As a result, earnings from three years ago have also fallen 49% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
In contrast to the company, the rest of the market is expected to grow by 6.0% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
In light of this, it's alarming that Holland Colours' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Bottom Line On Holland Colours' P/E
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.
We've established that Holland Colours currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Having said that, be aware Holland Colours is showing 4 warning signs in our investment analysis, and 1 of those is a bit concerning.
If you're unsure about the strength of Holland Colours' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
