Earnings Not Telling The Story For REN - Redes Energéticas Nacionais, SGPS, S.A. (ELI:RENE)

There wouldn't be many who think REN - Redes Energéticas Nacionais, SGPS, S.A.'s (ELI:RENE) price-to-earnings (or "P/E") ratio of 12.2x is worth a mention when the median P/E in Portugal is similar at about 12x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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REN - Redes Energéticas Nacionais SGPS certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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.

Check out our latest analysis for REN - Redes Energéticas Nacionais SGPS

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Does Growth Match The P/E?

In order to justify its P/E ratio, REN - Redes Energéticas Nacionais SGPS would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 16%. The strong recent performance means it was also able to grow EPS by 66% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 4.9% per year as estimated by the eight analysts watching the company. Meanwhile, the broader market is forecast to expand by 8.4% each year, which paints a poor picture.

In light of this, it's somewhat alarming that REN - Redes Energéticas Nacionais SGPS' P/E sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Key Takeaway

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.

Our examination of REN - Redes Energéticas Nacionais SGPS' analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 3 warning signs for REN - Redes Energéticas Nacionais SGPS (1 can't be ignored!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on REN - Redes Energéticas Nacionais 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.