With a price-to-earnings (or “P/E”) ratio of 8.2x Ercros, S.A. (BME:ECR) may be sending very bullish signals at the moment, given that almost half of all companies in Spain have P/E ratios greater than 19x and even P/E’s higher than 43x 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 limited.
There hasn’t been much to differentiate Ercros’ and the market’s retreating earnings lately. One possibility is that the P/E is low because investors think the company’s earnings may begin to slide even faster. You’d much rather the company wasn’t bleeding earnings if you still believe in the business. At the very least, you’d be hoping that earnings don’t fall off a cliff if your plan is to pick up some stock while it’s out of favour.free report on Ercros.
Is There Any Growth For Ercros?
There’s an inherent assumption that a company should far underperform the market for P/E ratios like Ercros’ to be considered reasonable.
If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 5.1%. As a result, earnings from three years ago have also fallen 46% overall. Therefore, it’s fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 0.2% per annum over the next three years. That’s shaping up to be materially lower than the 13% each year growth forecast for the broader market.
In light of this, it’s understandable that Ercros’ P/E sits below the majority of other companies. Apparently many shareholders weren’t comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.
We’ve established that Ercros maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.
You always need to take note of risks, for example – Ercros has 4 warning signs we think you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.
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This article by Simply Wall St is general in nature. 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.
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