Xilam Animation's (EPA:XIL) Price Is Right But Growth Is Lacking After Shares Rocket 27%

Xilam Animation (EPA:XIL) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 80% share price decline over the last year.

Even after such a large jump in price, given about half the companies in France have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Xilam Animation as a highly attractive investment with its 4.9x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Xilam Animation certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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.

View our latest analysis for Xilam Animation

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

Does Growth Match The Low P/E?

Xilam Animation's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 255% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 70% 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.

Shifting to the future, estimates from the two analysts covering the company suggest earnings growth is heading into negative territory, declining 25% each year over the next three years. Meanwhile, the broader market is forecast to expand by 14% per year, which paints a poor picture.

In light of this, it's understandable that Xilam Animation's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Xilam Animation's recent share price jump still sees its P/E sitting firmly flat on the ground. 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.

As we suspected, our examination of Xilam Animation's analyst forecasts revealed that its outlook for shrinking earnings 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.

Having said that, be aware Xilam Animation is showing 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

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.