Rai Way S.p.A.'s (BIT:RWAY) Business Is Trailing The Market But Its Shares Aren't

Rai Way S.p.A.'s (BIT:RWAY) price-to-earnings (or "P/E") ratio of 16.2x might make it look like a sell right now compared to the market in Italy, where around half of the companies have P/E ratios below 14x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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We'd have to say that with no tangible growth over the last year, Rai Way's earnings have been unimpressive. It might be that many are expecting an improvement to the uninspiring earnings performance over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Rai Way

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Rai Way's earnings, revenue and cash flow.

How Is Rai Way's Growth Trending?

In order to justify its P/E ratio, Rai Way would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Although pleasingly EPS has lifted 37% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 19% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Rai Way is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Rai Way's P/E

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 Rai Way currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Rai Way is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious.

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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.