Enel SpA's (BIT:ENEL) Shares May Have Run Too Fast Too Soon

With a median price-to-earnings (or "P/E") ratio of close to 15x in Italy, you could be forgiven for feeling indifferent about Enel SpA's (BIT:ENEL) P/E ratio of 15.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Enel certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Enel

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Enel.

Is There Some Growth For Enel?

The only time you'd be comfortable seeing a P/E like Enel's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 53%. The strong recent performance means it was also able to grow EPS by 76% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 14% per annum over the next three years. That's shaping up to be materially lower than the 17% each year growth forecast for the broader market.

With this information, we find it interesting that Enel is trading at a fairly similar P/E to the market. 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.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Enel currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 2 warning signs we've spotted with Enel (including 1 which shouldn't be ignored).

You might be able to find a better investment than Enel. 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).

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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.