Enel SpA's (BIT:ENEL) Business Is Yet to Catch Up With Its Share Price

There wouldn't be many who think Enel SpA's (BIT:ENEL) price-to-earnings (or "P/E") ratio of 14.1x is worth a mention when the median P/E in Italy is similar at about 14x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's superior to most other companies of late, Enel has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

See our latest analysis for Enel

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

Is There Some Growth For Enel?

In order to justify its P/E ratio, Enel would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 36% last year. The latest three year period has also seen an excellent 117% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 10.0% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 12% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's curious that Enel's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From Enel's P/E?

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.

We've established that Enel currently trades on a 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 moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 2 warning signs for Enel that we have uncovered.

Of course, you might also be able to find a better stock than Enel. 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.