A Piece Of The Puzzle Missing From Centrale del Latte d'Italia S.p.A.'s (BIT:CLI) 26% Share Price Climb

Centrale del Latte d'Italia S.p.A. (BIT:CLI) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 59%.

Although its price has surged higher, Centrale del Latte d'Italia may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 14.1x, since almost half of all companies in Italy have P/E ratios greater than 17x and even P/E's higher than 29x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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With earnings growth that's inferior to most other companies of late, Centrale del Latte d'Italia has been relatively sluggish. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.

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

Centrale del Latte d'Italia's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. That's essentially a continuation of what we've seen over the last three years, as its EPS growth has been virtually non-existent for that entire period. Accordingly, shareholders probably wouldn't have been satisfied with the complete absence of medium-term growth.

Turning to the outlook, the next three years should generate growth of 31% each year as estimated by the lone analyst watching the company. With the market only predicted to deliver 15% per year, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Centrale del Latte d'Italia's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Centrale del Latte d'Italia's P/E

Centrale del Latte d'Italia's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Centrale del Latte d'Italia 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Centrale del Latte d'Italia, and understanding these should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.