The Market Doesn't Like What It Sees From Energiedienst Holding AG's (VTX:EDHN) Earnings Yet

With a price-to-earnings (or "P/E") ratio of 12.3x Energiedienst Holding AG (VTX:EDHN) may be sending bullish signals at the moment, given that almost half of all companies in Switzerland have P/E ratios greater than 22x and even P/E's higher than 35x are not unusual. 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 Energiedienst Holding as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Energiedienst Holding

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Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered a decent 8.1% gain to the company's bottom line. Pleasingly, EPS has also lifted 148% in aggregate from three years ago, partly 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 sole analyst covering the company suggest earnings growth is heading into negative territory, declining 27% over the next year. With the market predicted to deliver 15% growth , that's a disappointing outcome.

In light of this, it's understandable that Energiedienst Holding's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Energiedienst Holding's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Energiedienst Holding (of which 1 makes us a bit uncomfortable!) you should know about.

Of course, you might also be able to find a better stock than Energiedienst Holding. 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.