With a price-to-earnings (or "P/E") ratio of 21.7x SOL S.p.A. (BIT:SOL) may be sending bearish signals at the moment, given that almost half of all companies in Italy have P/E ratios under 14x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
SOL's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for SOL
How Is SOL's Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like SOL's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 9.0%. The latest three year period has also seen an excellent 41% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 11% during the coming year according to the one analyst following the company. Meanwhile, the rest of the market is forecast to expand by 21%, which is noticeably more attractive.
In light of this, it's alarming that SOL's P/E sits above the majority of other companies. 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
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 SOL currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for SOL with six simple checks on some of these key factors.
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.
About BIT:SOL
SOL
Engages in the applied research, production, and marketing of technical and medical gases in Italy and internationally.
Flawless balance sheet average dividend payer.
