When close to half the companies in Italy have price-to-earnings ratios (or "P/E's") above 14x, you may consider A2A S.p.A. (BIT:A2A) as an attractive investment with its 7.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
With earnings growth that's superior to most other companies of late, A2A has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Check out our latest analysis for A2A
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as A2A's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered an exceptional 147% gain to the company's bottom line. The latest three year period has also seen an excellent 55% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 12% per year over the next three years. Meanwhile, the broader market is forecast to expand by 15% per annum, which paints a poor picture.
With this information, we are not surprised that A2A is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. 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 A2A's P/E
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of A2A'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.
We don't want to rain on the parade too much, but we did also find 3 warning signs for A2A (1 is significant!) that you need to be mindful of.
Of course, you might also be able to find a better stock than A2A. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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:A2A
A2A
Engages in the production, sale, and distribution of gas and electricity, and district heating in Italy and internationally.
Solid track record with adequate balance sheet and pays a dividend.
