Investors Don't See Light At End Of Italgas S.p.A.'s (BIT:IG) Tunnel

With a price-to-earnings (or "P/E") ratio of 8.8x Italgas S.p.A. (BIT:IG) may be sending bullish signals at the moment, given that almost half of all companies in Italy have P/E ratios greater than 14x and even P/E's higher than 26x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Italgas certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Italgas

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

How Is Italgas' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Italgas' to be considered reasonable.

Retrospectively, the last year delivered a decent 7.1% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 14% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 3.2% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 19% per year, which is noticeably more attractive.

In light of this, it's understandable that Italgas' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Italgas' P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Italgas' analyst forecasts revealed that its inferior earnings outlook 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.

Plus, you should also learn about these 2 warning signs we've spotted with Italgas (including 1 which is a bit concerning).

If you're unsure about the strength of Italgas' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.