ILPRA S.p.A. (BIT:ILP) Screens Well But There Might Be A Catch

With a price-to-earnings (or "P/E") ratio of 11.4x ILPRA S.p.A. (BIT:ILP) may be sending bullish signals at the moment, given that almost half of all companies in Italy have P/E ratios greater than 15x and even P/E's higher than 23x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

ILPRA hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for ILPRA

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

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

There's an inherent assumption that a company should underperform the market for P/E ratios like ILPRA's to be considered reasonable.

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 24%. 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 14% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 24% per annum over the next three years. With the market only predicted to deliver 13% per year, the company is positioned for a stronger earnings result.

With this information, we find it odd that ILPRA is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From ILPRA's P/E?

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.

We've established that ILPRA currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many 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 ILPRA (1 doesn't sit too well with us!) that you need to be mindful of.

If you're unsure about the strength of ILPRA'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.