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

Galp Energia, SGPS, S.A.'s (ELI:GALP) price-to-earnings (or "P/E") ratio of 8.9x might make it look like a buy right now compared to the market in Portugal, where around half of the companies have P/E ratios above 14x and even P/E's above 23x are quite common. 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 inferior to most other companies of late, Galp Energia SGPS has been relatively sluggish. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out 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.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Likewise, not much has changed from three years ago as earnings have been stuck during that whole time. Therefore, it's fair to say that earnings growth has definitely eluded the company recently.

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 6.6% per year over the next three years. Meanwhile, the broader market is forecast to expand by 4.7% per year, which paints a poor picture.

With this information, we are not surprised that Galp Energia SGPS is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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.

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. 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.

Before you settle on your opinion, we've discovered 2 warning signs for Galp Energia SGPS (1 shouldn't be ignored!) that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.