STEF SA (EPA:STF) Could Be Riskier Than It Looks

There wouldn't be many who think STEF SA's (EPA:STF) price-to-earnings (or "P/E") ratio of 16.4x is worth a mention when the median P/E in France is similar at about 16x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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STEF has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for STEF

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

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

The only time you'd be comfortable seeing a P/E like STEF's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a frustrating 41% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 27% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 24% each year during the coming three years according to the five analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 13% per annum, which is noticeably less attractive.

In light of this, it's curious that STEF's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that STEF currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for STEF that you need to be mindful of.

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.