Little Excitement Around Energiekontor AG's (ETR:EKT) Earnings

With a price-to-earnings (or "P/E") ratio of 11.5x Energiekontor AG (ETR:EKT) may be sending bullish signals at the moment, given that almost half of all companies in Germany have P/E ratios greater than 18x and even P/E's higher than 32x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Energiekontor has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.

See our latest analysis for Energiekontor

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Energiekontor.

Is There Any Growth For Energiekontor?

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

Retrospectively, the last year delivered an exceptional 88% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 320% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 3.4% per year during the coming three years according to the four analysts following the company. That's not great when the rest of the market is expected to grow by 13% each year.

With this information, we are not surprised that Energiekontor is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Energiekontor'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.

As we suspected, our examination of Energiekontor'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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 3 warning signs for Energiekontor (1 is a bit unpleasant!) that we have uncovered.

If you're unsure about the strength of Energiekontor'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.