Subdued Growth No Barrier To Mota-Engil, SGPS, S.A.'s (ELI:EGL) Price

With a median price-to-earnings (or "P/E") ratio of close to 13x in Portugal, you could be forgiven for feeling indifferent about Mota-Engil, SGPS, S.A.'s (ELI:EGL) P/E ratio of 13.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Recent times have been more advantageous for Mota-Engil SGPS as its earnings haven't fallen as much as the rest of the market. One possibility is that the P/E is moderate because investors think this relatively better earnings performance might be about to evaporate. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. In saying that, existing shareholders probably aren't too pessimistic about the share price if the company's earnings continue outplaying the market.

Check out our latest analysis for Mota-Engil SGPS

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Does Growth Match The P/E?

In order to justify its P/E ratio, Mota-Engil SGPS would need to produce growth that's similar to the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Although pleasingly EPS has lifted 377% in aggregate from three years ago, notwithstanding the last 12 months. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 9.2% per year during the coming three years according to the dual analysts following the company. With the market predicted to deliver 12% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's curious that Mota-Engil SGPS' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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.

Our examination of Mota-Engil SGPS' 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.

It is also worth noting that we have found 2 warning signs for Mota-Engil SGPS (1 makes us a bit uncomfortable!) that you need to take into consideration.

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.