What REN - Redes Energéticas Nacionais, SGPS, S.A.'s (ELI:RENE) P/E Is Not Telling You

With a median price-to-earnings (or "P/E") ratio of close to 12x in Portugal, you could be forgiven for feeling indifferent about REN - Redes Energéticas Nacionais, SGPS, S.A.'s (ELI:RENE) P/E ratio of 11.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's inferior to most other companies of late, REN - Redes Energéticas Nacionais SGPS has been relatively sluggish. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for REN - Redes Energéticas Nacionais SGPS

Keen to find out how analysts think REN - Redes Energéticas Nacionais SGPS' future stacks up against the industry? In that case, our free report is a great place to start.

How Is REN - Redes Energéticas Nacionais SGPS' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like REN - Redes Energéticas Nacionais SGPS' to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 8.4%. Pleasingly, EPS has also lifted 35% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 4.2% each year during the coming three years according to the five analysts following the company. With the market predicted to deliver 2.8% growth per annum, that's a disappointing outcome.

With this information, we find it concerning that REN - Redes Energéticas Nacionais SGPS is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. 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.

What We Can Learn From REN - Redes Energéticas Nacionais SGPS' P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for REN - Redes Energéticas Nacionais SGPS (2 are concerning!) that you need to be mindful of.

You might be able to find a better investment than REN - Redes Energéticas Nacionais SGPS. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.