EnviTec Biogas AG (ETR:ETG) shareholders won't be pleased to see that the share price has had a very rough month, dropping 31% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 28% in that time.
Following the heavy fall in price, EnviTec Biogas may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 12.9x, since almost half of all companies in Germany have P/E ratios greater than 19x and even P/E's higher than 38x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
EnviTec Biogas has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.
View our latest analysis for EnviTec Biogas
How Is EnviTec Biogas' Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like EnviTec Biogas' to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 28%. The strong recent performance means it was also able to grow EPS by 82% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
It's interesting to note that the rest of the market is similarly expected to grow by 20% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.
With this information, we find it odd that EnviTec Biogas is trading at a P/E lower than the market. It may be that most investors are not convinced the company can maintain recent growth rates.
The Bottom Line On EnviTec Biogas' P/E
EnviTec Biogas' recently weak share price has pulled its P/E below most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that EnviTec Biogas currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.
Plus, you should also learn about these 4 warning signs we've spotted with EnviTec Biogas (including 2 which are significant).
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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