With a price-to-earnings (or “P/E”) ratio of 24.2x Acciona, S.A. (BME:ANA) may be sending bearish signals at the moment, given that almost half of all companies in Spain have P/E ratios under 17x and even P/E’s lower than 9x are not unusual. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
Recent times haven’t been advantageous for Acciona as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.free report on Acciona.
How Is Acciona’s Growth Trending?
There’s an inherent assumption that a company should outperform the market for P/E ratios like Acciona’s 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 26%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 23% per year during the coming three years according to the eleven analysts following the company. That’s shaping up to be materially higher than the 14% per year growth forecast for the broader market.
In light of this, it’s understandable that Acciona’s P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Acciona’s P/E?
While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.
As we suspected, our examination of Acciona’s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. It’s hard to see the share price falling strongly in the near future under these circumstances.
You need to take note of risks, for example – Acciona has 2 warning signs (and 1 which is potentially serious) we think you should know about.
You might be able to find a better investment than Acciona. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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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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