Investors Appear Satisfied With Grenergy Renovables, S.A.'s (BME:GRE) Prospects As Shares Rocket 25%

Despite an already strong run, Grenergy Renovables, S.A. (BME:GRE) shares have been powering on, with a gain of 25% in the last thirty days. The last 30 days bring the annual gain to a very sharp 71%.

After such a large jump in price, Grenergy Renovables may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 21.6x, since almost half of all companies in Spain have P/E ratios under 19x and even P/E's lower than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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With earnings growth that's superior to most other companies of late, Grenergy Renovables has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Grenergy Renovables

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

Is There Enough Growth For Grenergy Renovables?

The only time you'd be truly comfortable seeing a P/E as high as Grenergy Renovables' is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 23%. The latest three year period has also seen an excellent 250% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 20% each year as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 12% per annum, which is noticeably less attractive.

With this information, we can see why Grenergy Renovables is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Grenergy Renovables' P/E

Grenergy Renovables shares have received a push in the right direction, but its P/E is elevated too. 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.

We've established that Grenergy Renovables maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for Grenergy Renovables (2 are significant!) that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.