algoWatt S.p.A. (BIT:ALW) Not Doing Enough For Some Investors As Its Shares Slump 26%

Unfortunately for some shareholders, the algoWatt S.p.A. (BIT:ALW) share price has dived 26% in the last thirty days, prolonging recent pain. Still, a bad month hasn't completely ruined the past year with the stock gaining 52%, which is great even in a bull market.

Since its price has dipped substantially, given close to half the companies in Italy have price-to-earnings ratios (or "P/E's") above 16x, you may consider algoWatt as a highly attractive investment with its 4.2x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

algoWatt certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out the opportunities and risks within the IT Electronic industry.

Keen to find out how analysts think algoWatt's future stacks up against the industry? In that case, our free report is a great place to start.

How Is algoWatt's Growth Trending?

In order to justify its P/E ratio, algoWatt would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 84%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the only analyst covering the company suggest earnings growth is heading into negative territory, declining 64% over the next year. Meanwhile, the broader market is forecast to expand by 20%, which paints a poor picture.

With this information, we are not surprised that algoWatt is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On algoWatt's P/E

Shares in algoWatt have plummeted and its P/E is now low enough to touch the ground. 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.

As we suspected, our examination of algoWatt's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 5 warning signs for algoWatt (of which 2 are potentially serious!) you should know about.

You might be able to find a better investment than algoWatt. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.