Improved Earnings Required Before Fomento de Construcciones y Contratas, S.A. (BME:FCC) Shares Find Their Feet

When close to half the companies in Spain have price-to-earnings ratios (or "P/E's") above 17x, you may consider Fomento de Construcciones y Contratas, S.A. (BME:FCC) as an attractive investment with its 10.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Fomento de Construcciones y Contratas certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

Check out our latest analysis for Fomento de Construcciones y Contratas

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

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Fomento de Construcciones y Contratas' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 80% gain to the company's bottom line. Pleasingly, EPS has also lifted 107% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 6.2% per year as estimated by the five analysts watching the company. That's not great when the rest of the market is expected to grow by 14% each year.

With this information, we are not surprised that Fomento de Construcciones y Contratas 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 Bottom Line On Fomento de Construcciones y Contratas' 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.

As we suspected, our examination of Fomento de Construcciones y Contratas' analyst forecasts revealed that its outlook for shrinking earnings 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Fomento de Construcciones y Contratas (1 is concerning!) that you should be aware of.

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.