Unpleasant Surprises Could Be In Store For DEME Group NV's (EBR:DEME) Shares

With a median price-to-earnings (or "P/E") ratio of close to 13x in Belgium, you could be forgiven for feeling indifferent about DEME Group NV's (EBR:DEME) P/E ratio of 11.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's superior to most other companies of late, DEME Group has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

See our latest analysis for DEME Group

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How Is DEME Group's Growth Trending?

In order to justify its P/E ratio, DEME Group would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 77% gain to the company's bottom line. Still, incredibly EPS has fallen 55% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 6.3% each year during the coming three years according to the six analysts following the company. That's shaping up to be materially lower than the 12% per year growth forecast for the broader market.

In light of this, it's curious that DEME Group's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that DEME Group currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for DEME Group with six simple checks on some of these key factors.

If you're unsure about the strength of DEME Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.