Corporación Acciona Energías Renovables, S.A.'s (BME:ANE) Shares Lagging The Market But So Is The Business

Corporación Acciona Energías Renovables, S.A.'s (BME:ANE) price-to-earnings (or "P/E") ratio of 12.7x 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 16x and even P/E's above 31x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Corporación Acciona Energías Renovables hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

View our latest analysis for Corporación Acciona Energías Renovables

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Corporación Acciona Energías Renovables.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Corporación Acciona Energías Renovables' to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 30%. Still, the latest three year period has seen an excellent 157% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 9.4% per year over the next three years. That's not great when the rest of the market is expected to grow by 12% per annum.

With this information, we are not surprised that Corporación Acciona Energías Renovables 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Corporación Acciona Energías Renovables maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

Plus, you should also learn about these 5 warning signs we've spotted with Corporación Acciona Energías Renovables (including 3 which shouldn't be ignored).

Of course, you might also be able to find a better stock than Corporación Acciona Energías Renovables. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.