The Market Doesn't Like What It Sees From S.P.E.E.H. Hidroelectrica S.A.'s (BVB:H2O) Earnings Yet

S.P.E.E.H. Hidroelectrica S.A.'s (BVB:H2O) price-to-earnings (or "P/E") ratio of 9.1x might make it look like a buy right now compared to the market in Romania, where around half of the companies have P/E ratios above 15x and even P/E's above 28x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for S.P.E.E.H. Hidroelectrica as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for S.P.E.E.H. Hidroelectrica

If you'd like to see what analysts are forecasting going forward, you should check out our free report on S.P.E.E.H. Hidroelectrica.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like S.P.E.E.H. Hidroelectrica's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 42%. Pleasingly, EPS has also lifted 305% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings growth is heading into negative territory, declining 21% over the next year. That's not great when the rest of the market is expected to grow by 7.2%.

With this information, we are not surprised that S.P.E.E.H. Hidroelectrica is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

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.

As we suspected, our examination of S.P.E.E.H. Hidroelectrica's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware S.P.E.E.H. Hidroelectrica is showing 2 warning signs in our investment analysis, and 1 of those is concerning.

Of course, you might also be able to find a better stock than S.P.E.E.H. Hidroelectrica. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.