Insufficient Growth At ElringKlinger AG (ETR:ZIL2) Hampers Share Price

ElringKlinger AG's (ETR:ZIL2) price-to-earnings (or "P/E") ratio of 5.6x might make it look like a strong buy right now compared to the market in Germany, where around half of the companies have P/E ratios above 17x and even P/E's above 32x 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.

With earnings growth that's superior to most other companies of late, ElringKlinger has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for ElringKlinger

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

How Is ElringKlinger's Growth Trending?

ElringKlinger's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 445% last year. The latest three year period has also seen an excellent 39% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 11% per year as estimated by the six analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 15% per year, which is noticeably more attractive.

In light of this, it's understandable that ElringKlinger's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of ElringKlinger's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. 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 1 warning sign for ElringKlinger you should know about.

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