Earnings Working Against Rexel S.A.'s (EPA:RXL) Share Price

Rexel S.A.'s (EPA:RXL) price-to-earnings (or "P/E") ratio of 10.3x might make it look like a buy right now compared to the market in France, where around half of the companies have P/E ratios above 14x and even P/E's above 25x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Rexel has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Rexel

Keen to find out how analysts think Rexel's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Rexel?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 21%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 58% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 7.5% per annum as estimated by the eleven analysts watching the company. With the market predicted to deliver 14% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Rexel's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Rexel's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Rexel'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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Rexel that you should be aware of.

You might be able to find a better investment than Rexel. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.