With Italmobiliare S.p.A. (BIT:ITM) It Looks Like You'll Get What You Pay For

When close to half the companies in Italy have price-to-earnings ratios (or "P/E's") below 16x, you may consider Italmobiliare S.p.A. (BIT:ITM) as a stock to avoid entirely with its 35.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Italmobiliare hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Italmobiliare

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Italmobiliare would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 72%. This means it has also seen a slide in earnings over the longer-term as EPS is down 48% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 62% per annum as estimated by the three analysts watching the company. With the market only predicted to deliver 16% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Italmobiliare's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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.

As we suspected, our examination of Italmobiliare's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Italmobiliare (1 is significant) you should be aware of.

Of course, you might also be able to find a better stock than Italmobiliare. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.