Investors Aren't Buying Iberdrola, S.A.'s (BME:IBE) Earnings

With a price-to-earnings (or "P/E") ratio of 16.7x Iberdrola, S.A. (BME:IBE) may be sending bullish signals at the moment, given that almost half of all companies in Spain have P/E ratios greater than 19x and even P/E's higher than 31x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Iberdrola 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.

Check out our latest analysis for Iberdrola

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Iberdrola would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 21% last year. The strong recent performance means it was also able to grow EPS by 53% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 7.2% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.2% per year, which is noticeably more attractive.

In light of this, it's understandable that Iberdrola's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

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 Iberdrola's analyst forecasts revealed that its inferior earnings outlook 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Iberdrola you should know about.

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.