There is reason to be concerned about the price of SAP SE (ETR:SAP).

When almost half of the companies in the software industry in Germany have a price-to-sales ratio (or “P/S”) of less than 2.2x, you might think about it SAP SE (ETR:SAP) is a stock to avoid with its P/E ratio of 7.9. However, it is not advisable to simply take the P/S at face value, as there may be an explanation as to why it is so high.

Check out our latest analysis for SAP

How SAP has developed

Recently, there has been little difference between SAP’s revenue growth and the industry. It is possible that the market expects a future improvement in sales development, which justifies the currently increased P/E ratio. However, if this isn’t the case, investors could get caught paying too much for the stock.

If you want to see what analysts are predicting for the future, you should check out our free Report on SAP.

Are the sales forecasts consistent with the high price-to-earnings ratio?

There is an inherent assumption that a company should far outperform the industry for price-to-earnings ratios like SAP’s to be considered reasonable.

If we review the last year of revenue growth, the company recorded a significant increase of 8.0%. The company also reported a 21% increase in overall revenue in the most recent three-year period, thanks in part to short-term performance. So, first of all, we can confirm that the company has actually done a good job of increasing sales during this time.

Sales are expected to grow 11% per year over the next three years, according to analysts covering the company. With annual growth of 13% forecast for the industry, the company is positioned for comparable sales results.

With this in mind, we find it fascinating that SAP’s P/E ratio is higher than its industry peers. Apparently many of the company’s investors are more optimistic than analysts would suggest and are currently unwilling to give up their shares. These shareholders may face disappointment if the P/E ratio falls to a level more in line with its growth prospects.

The last word

Generally, we limit our use of the price-to-sales ratio to determining what the market thinks about the overall health of a company.

With revenues expected to grow in line with the broader industry, it appears that SAP is currently trading at a higher P/E than expected. At the moment we are unhappy with the relatively high share price as forecast future sales are unlikely to support this positive sentiment for long. To justify the current price-to-sales ratio, a positive change is required.

You should always think about risks. Case in point: We discovered it 1 warning sign for SAP You should be aware of that.

Naturally, Profitable companies with a history of high earnings growth are generally safer bets. Maybe you would like to see this free Collection of other companies that have reasonable P/E ratios and have grown profits significantly.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.