EDP - Energias de Portugal, S.A.'s (ELI:EDP) Business Is Yet to Catch Up With Its Share Price

With a price-to-earnings (or "P/E") ratio of 16.9x EDP - Energias de Portugal, S.A. (ELI:EDP) may be sending very bearish signals at the moment, given that almost half of all companies in Portugal have P/E ratios under 11x and even P/E's lower than 6x 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 so lofty.

With earnings growth that's superior to most other companies of late, EDP - Energias de Portugal has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for EDP - Energias de Portugal

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

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as EDP - Energias de Portugal's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 73% last year. The strong recent performance means it was also able to grow EPS by 112% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 5.6% per year over the next three years. That's shaping up to be similar to the 4.5% per year growth forecast for the broader market.

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

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that EDP - Energias de Portugal currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for EDP - Energias de Portugal (of which 1 is concerning!) you should know about.

If these risks are making you reconsider your opinion on EDP - Energias de Portugal, 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.