Servizi Italia S.p.A.'s (BIT:SRI) price-to-earnings (or "P/E") ratio of 10x might make it look like a buy right now compared to the market in Italy, where around half of the companies have P/E ratios above 15x and even P/E's above 27x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Servizi Italia as its earnings have been rising slower than most other companies. The P/E is probably low because investors think this lacklustre 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 Servizi Italia
How Is Servizi Italia's Growth Trending?
Servizi 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.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.6% last year. Pleasingly, EPS has also lifted 326% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 37% over the next year. With the market only predicted to deliver 22%, the company is positioned for a stronger earnings result.
With this information, we find it odd that Servizi Italia 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 Servizi Italia's P/E?
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Servizi Italia's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Servizi Italia (1 doesn't sit too well with us) you should be aware of.
You might be able to find a better investment than Servizi Italia. 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.
About BIT:SRI
Servizi Italia
Provides wash-hire and sterilization services in Italy, Turkey, and Brazil.
Fair value with mediocre balance sheet.
