Endesa, S.A.'s (BME:ELE) Low P/E No Reason For Excitement

When close to half the companies in Spain have price-to-earnings ratios (or "P/E's") above 15x, you may consider Endesa, S.A. (BME:ELE) as an attractive investment with its 10.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Endesa 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 you 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.

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How Is Endesa's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Endesa's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 20%. The latest three year period has also seen a 29% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 0.1% per year over the next three years. Meanwhile, the broader market is forecast to expand by 7.7% per year, which paints a poor picture.

With this information, we are not surprised that Endesa is trading at a P/E lower than the market. 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 Key Takeaway

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 Endesa'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.

Plus, you should also learn about these 2 warning signs we've spotted with Endesa.

If you're unsure about the strength of Endesa's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.