Romande Energie Holding SA's (VTX:REHN) Shares Lagging The Market But So Is The Business

When close to half the companies in Switzerland have price-to-earnings ratios (or "P/E's") above 21x, you may consider Romande Energie Holding SA (VTX:REHN) as a highly attractive investment with its 5.9x P/E ratio. 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.

Romande Energie Holding certainly has been doing a good job lately as it's been growing earnings more 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 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 Romande Energie Holding

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

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Romande Energie Holding would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 477% gain to the company's bottom line. Pleasingly, EPS has also lifted 169% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 23% per annum over the next three years. That's not great when the rest of the market is expected to grow by 14% each year.

In light of this, it's understandable that Romande Energie Holding's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Romande Energie Holding's 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 Romande Energie Holding 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Romande Energie Holding (1 can't be ignored) you should be aware of.

You might be able to find a better investment than Romande Energie Holding. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.