There's Reason For Concern Over Industrie De Nora S.p.A.'s (BIT:DNR) Price

Industrie De Nora S.p.A.'s (BIT:DNR) price-to-earnings (or "P/E") ratio of 16.1x might make it look like a sell right now compared to the market in Italy, where around half of the companies have P/E ratios below 14x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Industrie De Nora hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Industrie De Nora

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

How Is Industrie De Nora's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Industrie De Nora's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 62% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 13% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 5.8% over the next year. With the market predicted to deliver 22% growth , that's a disappointing outcome.

In light of this, it's alarming that Industrie De Nora's P/E sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

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 Industrie De Nora currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

You might be able to find a better investment than Industrie De Nora. 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.