Improved Earnings Required Before Danieli & C. Officine Meccaniche S.p.A. (BIT:DAN) Stock's 31% Jump Looks Justified

The Danieli & C. Officine Meccaniche S.p.A. (BIT:DAN) share price has done very well over the last month, posting an excellent gain of 31%. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Although its price has surged higher, given about half the companies in Italy have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Danieli & C. Officine Meccaniche as an attractive investment with its 9.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

While the market has experienced earnings growth lately, Danieli & C. Officine Meccaniche's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Danieli & C. Officine Meccaniche

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

In order to justify its P/E ratio, Danieli & C. Officine Meccaniche would need to produce sluggish growth that's trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 1.2%. Still, the latest three year period has seen an excellent 201% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 7.0% per year over the next three years. With the market predicted to deliver 14% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Danieli & C. Officine Meccaniche is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Danieli & C. Officine Meccaniche's P/E?

Danieli & C. Officine Meccaniche's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of Danieli & C. Officine Meccaniche'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.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Danieli & C. Officine Meccaniche with six simple checks on some of these key factors.

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.