Investors Still Waiting For A Pull Back In ERG S.p.A. (BIT:ERG)

With a price-to-earnings (or "P/E") ratio of 34.2x ERG S.p.A. (BIT:ERG) may be sending very bearish signals at the moment, given that almost half of all companies in Italy have P/E ratios under 14x and even P/E's lower than 8x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, ERG has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for ERG

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

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as ERG's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 61% gain to the company's bottom line. Pleasingly, EPS has also lifted 234% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 97% as estimated by the six analysts watching the company. With the market only predicted to deliver 19%, the company is positioned for a stronger earnings result.

With this information, we can see why ERG is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On ERG's P/E

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 ERG maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for ERG you should be aware of.

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