With a price-to-earnings (or "P/E") ratio of 6.2x Vicat S.A. (EPA:VCT) may be sending very bullish signals at the moment, given that almost half of all companies in France have P/E ratios greater than 17x and even P/E's higher than 28x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Vicat as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Vicat
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Vicat's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 66%. The strong recent performance means it was also able to grow EPS by 68% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 3.7% per annum during the coming three years according to the four analysts following the company. With the market predicted to deliver 13% growth per annum, the company is positioned for a weaker earnings result.
In light of this, it's understandable that Vicat'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
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Vicat maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Vicat that you should be aware of.
If you're unsure about the strength of Vicat'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.
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About ENXTPA:VCT
Vicat
Engages in the production and sale of cement, ready-mixed concrete, and aggregates for construction industry.
Undervalued with solid track record and pays a dividend.
