Insufficient Growth At Semapa - Sociedade de Investimento e Gestão, SGPS, S.A. (ELI:SEM) Hampers Share Price

Explore Semapa - Sociedade de Investimento e Gestão SGPS's Fair Values from the Community and select yours

With a price-to-earnings (or "P/E") ratio of 6.3x Semapa - Sociedade de Investimento e Gestão, SGPS, S.A. (ELI:SEM) may be sending very bullish signals at the moment, given that almost half of all companies in Portugal have P/E ratios greater than 13x and even P/E's higher than 22x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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There hasn't been much to differentiate Semapa - Sociedade de Investimento e Gestão SGPS' and the market's retreating earnings lately. One possibility is that the P/E is low because investors think the company's earnings may begin to slide even faster. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders may feel hopeful about the share price if the company's earnings continue tracking the market.

Check out our latest analysis for Semapa - Sociedade de Investimento e Gestão SGPS

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Semapa - Sociedade de Investimento e Gestão SGPS would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 4.9% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 5.5% per year as estimated by the three analysts watching the company. That's not great when the rest of the market is expected to grow by 10% per annum.

With this information, we are not surprised that Semapa - Sociedade de Investimento e Gestão 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Semapa - Sociedade de Investimento e Gestão SGPS maintains its low P/E on the weakness of its forecast for sliding earnings, 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.

Having said that, be aware Semapa - Sociedade de Investimento e Gestão SGPS is showing 3 warning signs in our investment analysis, and 1 of those is concerning.

If these risks are making you reconsider your opinion on Semapa - Sociedade de Investimento e Gestão SGPS, 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.