Improved Earnings Required Before Proximus PLC (EBR:PROX) Shares Find Their Feet

Proximus PLC's (EBR:PROX) price-to-earnings (or "P/E") ratio of 4.2x might make it look like a strong buy right now compared to the market in Belgium, where around half of the companies have P/E ratios above 16x and even P/E's above 23x are quite common. 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.

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Proximus certainly has been doing a good job lately as it's been growing earnings more 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 Proximus

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How Is Proximus' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Proximus' is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 58% last year. The latest three year period has also seen a 28% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 15% per year as estimated by the eleven analysts watching the company. Meanwhile, the broader market is forecast to expand by 13% each year, which paints a poor picture.

With this information, we are not surprised that Proximus 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 Bottom Line On Proximus' P/E

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.

We've established that Proximus maintains its low P/E on the weakness of its forecast for sliding earnings, 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Proximus (1 shouldn't be ignored) you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.