EDP, S.A.'s (ELI:EDP) Business Is Trailing The Market But Its Shares Aren't

It's not a stretch to say that EDP, S.A.'s (ELI:EDP) price-to-earnings (or "P/E") ratio of 12x right now seems quite "middle-of-the-road" compared to the market in Portugal, where the median P/E ratio is around 12x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been advantageous for EDP as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for EDP

Want the full picture on analyst estimates for the company? Then our free report on EDP will help you uncover what's on the horizon.

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

EDP's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 49% last year. The strong recent performance means it was also able to grow EPS by 45% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 0.1% per year as estimated by the analysts watching the company. That's not great when the rest of the market is expected to grow by 5.0% each year.

In light of this, it's somewhat alarming that EDP's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

What We Can Learn From EDP's P/E?

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 EDP currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect 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.

Before you take the next step, you should know about the 4 warning signs for EDP (2 are a bit concerning!) that we have uncovered.

Of course, you might also be able to find a better stock than EDP. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.