There wouldn't be many who think Reply S.p.A.'s (BIT:REY) price-to-earnings (or "P/E") ratio of 15.9x is worth a mention when the median P/E in Italy is similar at about 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
The earnings growth achieved at Reply over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.
Check out our latest analysis for Reply
What Are Growth Metrics Telling Us About The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Reply's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 10%. The latest three year period has also seen an excellent 52% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's curious that Reply's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.
The Final Word
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Reply revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Reply with six simple checks will allow you to discover any risks that could be an issue.
You might be able to find a better investment than Reply. 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).
Valuation is complex, but we're here to simplify it.
Discover if Reply might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.