Getting In Cheap On Elisa Oyj (HEL:ELISA) Is Unlikely

With a median price-to-earnings (or "P/E") ratio of close to 18x in Finland, you could be forgiven for feeling indifferent about Elisa Oyj's (HEL:ELISA) P/E ratio of 18.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been more advantageous for Elisa Oyj as its earnings haven't fallen as much as the rest of the market. It might be that many expect the comparatively superior earnings performance to vanish, which has kept the P/E from rising. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders probably aren't too pessimistic about the share price if the company's earnings continue outplaying the market.

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What Are Growth Metrics Telling Us About The P/E?

Elisa Oyj's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 3.0%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 10% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 5.3% per year as estimated by the analysts watching the company. With the market predicted to deliver 16% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Elisa Oyj is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Elisa Oyj's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Elisa Oyj (1 is a bit unpleasant!) that we have uncovered.

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.