Investors Don't See Light At End Of SMA Solar Technology AG's (ETR:S92) Tunnel And Push Stock Down 42%

SMA Solar Technology AG (ETR:S92) shareholders that were waiting for something to happen have been dealt a blow with a 42% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 66% loss during that time.

After such a large drop in price, given about half the companies in Germany have price-to-earnings ratios (or "P/E's") above 18x, you may consider SMA Solar Technology as a highly attractive investment with its 4.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's superior to most other companies of late, SMA Solar Technology 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 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 SMA Solar Technology

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, SMA Solar Technology would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 94% gain to the company's bottom line. Pleasingly, EPS has also lifted 457% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 9.0% per year as estimated by the six analysts watching the company. That's not great when the rest of the market is expected to grow by 14% per annum.

In light of this, it's understandable that SMA Solar Technology'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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From SMA Solar Technology's P/E?

SMA Solar Technology's P/E looks about as weak as its stock price lately. 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.

We've established that SMA Solar Technology maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 3 warning signs we've spotted with SMA Solar Technology.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com