Investor Optimism Abounds Koninklijke KPN N.V. (AMS:KPN) But Growth Is Lacking

It's not a stretch to say that Koninklijke KPN N.V.'s (AMS:KPN) price-to-earnings (or "P/E") ratio of 17.1x right now seems quite "middle-of-the-road" compared to the market in the Netherlands, where the median P/E ratio is around 16x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times haven't been advantageous for Koninklijke KPN as its earnings have been rising slower than most other companies. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

View our latest analysis for Koninklijke KPN

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

How Is Koninklijke KPN's Growth Trending?

The only time you'd be comfortable seeing a P/E like Koninklijke KPN's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a decent 5.7% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 35% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 9.7% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 13% per year, which is noticeably more attractive.

With this information, we find it interesting that Koninklijke KPN is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Koninklijke KPN's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Koninklijke KPN has 2 warning signs we think you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.