ACS, Actividades de Construcción y Servicios, S.A.'s (BME:ACS) Prospects Need A Boost To Lift Shares

ACS, Actividades de Construcción y Servicios, S.A.'s (BME:ACS) price-to-earnings (or "P/E") ratio of 15.2x might make it look like a buy right now compared to the market in Spain, where around half of the companies have P/E ratios above 19x and even P/E's above 31x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

ACS Actividades de Construcción y Servicios could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for ACS Actividades de Construcción y Servicios

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Is There Any Growth For ACS Actividades de Construcción y Servicios?

In order to justify its P/E ratio, ACS Actividades de Construcción y Servicios would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.9% last year. Pleasingly, EPS has also lifted 163% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 4.0% per year over the next three years. That's shaping up to be materially lower than the 11% each year growth forecast for the broader market.

With this information, we can see why ACS Actividades de Construcción y Servicios is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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.

As we suspected, our examination of ACS Actividades de Construcción y Servicios' analyst forecasts revealed that its inferior earnings outlook 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for ACS Actividades de Construcción y Servicios you should be aware of, and 1 of them doesn't sit too well with us.

If these risks are making you reconsider your opinion on ACS Actividades de Construcción y Servicios, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.