Earnings Working Against RWE Aktiengesellschaft's (ETR:RWE) Share Price

With a price-to-earnings (or "P/E") ratio of 10x RWE Aktiengesellschaft (ETR:RWE) may be sending bullish signals at the moment, given that almost half of all companies in Germany have P/E ratios greater than 19x and even P/E's higher than 37x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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RWE could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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 RWE

Want the full picture on analyst estimates for the company? Then our free report on RWE will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, RWE would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 69% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 3.8% each year during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 17% per annum, which paints a poor picture.

In light of this, it's understandable that RWE'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.

The Bottom Line On RWE's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of RWE's analyst forecasts revealed that its outlook for shrinking earnings 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 3 warning signs for RWE (of which 1 doesn't sit too well with us!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.