Investors Aren't Entirely Convinced By Telekom Austria AG's (VIE:TKA) Earnings

With a price-to-earnings (or "P/E") ratio of 8.7x Telekom Austria AG (VIE:TKA) may be sending bullish signals at the moment, given that almost half of all companies in Austria have P/E ratios greater than 14x and even P/E's higher than 23x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

The recently shrinking earnings for Telekom Austria have been in line with the market. 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. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.

See our latest analysis for Telekom Austria

Keen to find out how analysts think Telekom Austria's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Telekom Austria would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 7.2% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 28% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 23% over the next year. That's shaping up to be materially higher than the 16% growth forecast for the broader market.

In light of this, it's peculiar that Telekom Austria's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Telekom Austria's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Telekom Austria currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Telekom Austria with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Telekom Austria. 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.