Prysmian S.p.A. (BIT:PRY) Investors Are Less Pessimistic Than Expected

When close to half the companies in Italy have price-to-earnings ratios (or "P/E's") below 16x, you may consider Prysmian S.p.A. (BIT:PRY) as a stock to potentially avoid with its 21.4x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Prysmian has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Prysmian

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

Is There Enough Growth For Prysmian?

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

Retrospectively, the last year delivered an exceptional 112% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 120% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 9.0% per year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 16% each year growth forecast for the broader market.

With this information, we find it concerning that Prysmian is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Prysmian's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Prysmian has 2 warning signs we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.