Insufficient Growth At Signify N.V. (AMS:LIGHT) Hampers Share Price

With a price-to-earnings (or "P/E") ratio of 7.9x Signify N.V. (AMS:LIGHT) may be sending very bullish signals at the moment, given that almost half of all companies in the Netherlands have P/E ratios greater than 19x and even P/E's higher than 31x 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 so limited.

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Recent times have been advantageous for Signify as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Signify

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

Is There Any Growth For Signify?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 58% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 17% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 2.9% per annum over the next three years. That's shaping up to be materially lower than the 15% per year growth forecast for the broader market.

With this information, we can see why Signify is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Signify maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about this 1 warning sign we've spotted with Signify.

If these risks are making you reconsider your opinion on Signify, 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.