Investors Don't See Light At End Of Galp Energia, SGPS, S.A.'s (ELI:GALP) Tunnel

With a price-to-earnings (or "P/E") ratio of 8.1x Galp Energia, SGPS, S.A. (ELI:GALP) may be sending bullish signals at the moment, given that almost half of all companies in Portugal have P/E ratios greater than 12x and even P/E's higher than 17x 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 limited.

With earnings growth that's superior to most other companies of late, Galp Energia SGPS has been doing relatively well. 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.

See our latest analysis for Galp Energia SGPS

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

How Is Galp Energia SGPS' Growth Trending?

In order to justify its P/E ratio, Galp Energia SGPS would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 25% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to slump, contracting by 6.7% each year during the coming three years according to the analysts following the company. That's not great when the rest of the market is expected to grow by 4.5% per annum.

With this information, we are not surprised that Galp Energia SGPS is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

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.

As we suspected, our examination of Galp Energia SGPS' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Galp Energia SGPS (1 is a bit concerning!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.