A Piece Of The Puzzle Missing From Koninklijke Heijmans N.V.'s (AMS:HEIJM) 28% Share Price Climb

Koninklijke Heijmans N.V. (AMS:HEIJM) shares have continued their recent momentum with a 28% gain in the last month alone. The annual gain comes to 172% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Koninklijke Heijmans may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 15.6x, since almost half of all companies in the Netherlands have P/E ratios greater than 19x and even P/E's higher than 29x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Koninklijke Heijmans 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.

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Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 38%. Pleasingly, EPS has also lifted 46% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 17% each year as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 15% per annum, which is not materially different.

In light of this, it's peculiar that Koninklijke Heijmans' P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

Koninklijke Heijmans' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Koninklijke Heijmans currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Koninklijke Heijmans that you should be aware of.

If you're unsure about the strength of Koninklijke Heijmans' 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.