E.ON SE's (ETR:EOAN) Earnings Are Not Doing Enough For Some Investors

E.ON SE's (ETR:EOAN) price-to-earnings (or "P/E") ratio of 5.2x 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 18x and even P/E's above 32x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, E.ON 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 E.ON

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

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

E.ON'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.

Retrospectively, the last year delivered an exceptional 114% gain to the company's bottom line. Pleasingly, EPS has also lifted 67% in aggregate from three years ago, thanks to the last 12 months of growth. 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 20% each year during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 13% per year, which paints a poor picture.

With this information, we are not surprised that E.ON 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 Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that E.ON 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. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 4 warning signs for E.ON (2 are potentially serious!) that you should be aware of before investing here.

If you're unsure about the strength of E.ON'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.