Unfortunately for some shareholders, the Fugro N.V. (AMS:FUR) share price has dived 25% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 54% loss during that time.
Even after such a large drop in price, Fugro's price-to-earnings (or "P/E") ratio of 4.5x might still make it look like a strong buy right now compared to the market in the Netherlands, where around half of the companies have P/E ratios above 16x and even P/E's above 26x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
Fugro could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Check out our latest analysis for Fugro
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Fugro's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 4.4%. Pleasingly, EPS has also lifted 305% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the six analysts covering the company suggest earnings growth is heading into negative territory, declining 2.0% each year over the next three years. That's not great when the rest of the market is expected to grow by 16% per annum.
With this information, we are not surprised that Fugro is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Final Word
Having almost fallen off a cliff, Fugro's share price has pulled its P/E way down as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Fugro maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.
It is also worth noting that we have found 1 warning sign for Fugro that you need to take into consideration.
If these risks are making you reconsider your opinion on Fugro, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.