Market Cool On Construcciones y Auxiliar de Ferrocarriles, S.A.'s (BME:CAF) Earnings

With a price-to-earnings (or "P/E") ratio of 11.4x Construcciones y Auxiliar de Ferrocarriles, S.A. (BME:CAF) may be sending bullish signals at the moment, given that almost half of all companies in Spain have P/E ratios greater than 20x and even P/E's higher than 32x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Construcciones y Auxiliar de Ferrocarriles certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Construcciones y Auxiliar de Ferrocarriles

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Construcciones y Auxiliar de Ferrocarriles.

How Is Construcciones y Auxiliar de Ferrocarriles' Growth Trending?

Construcciones y Auxiliar de Ferrocarriles' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 91%. The latest three year period has also seen a 27% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 17% per year as estimated by the seven analysts watching the company. With the market predicted to deliver 16% growth each year, the company is positioned for a comparable earnings result.

With this information, we find it odd that Construcciones y Auxiliar de Ferrocarriles is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Bottom Line On Construcciones y Auxiliar de Ferrocarriles' P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Construcciones y Auxiliar de Ferrocarriles currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you take the next step, you should know about the 1 warning sign for Construcciones y Auxiliar de Ferrocarriles that we have uncovered.

You might be able to find a better investment than Construcciones y Auxiliar de Ferrocarriles. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.