Why Investors Shouldn't Be Surprised By Digi Communications N.V.'s (BVB:DIGI) Low P/E

With a price-to-earnings (or "P/E") ratio of 4.9x Digi Communications N.V. (BVB:DIGI) may be sending very bullish signals at the moment, given that almost half of all companies in Romania have P/E ratios greater than 16x and even P/E's higher than 46x 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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With its earnings growth in positive territory compared to the declining earnings of most other companies, Digi Communications has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Digi Communications

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Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Digi Communications' is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 227% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 696% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 38% per annum as estimated by the three analysts watching the company. With the market predicted to deliver 11% growth per annum, that's a disappointing outcome.

With this information, we are not surprised that Digi Communications 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Digi Communications' P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Digi Communications' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 3 warning signs for Digi Communications you should be aware of, and 2 of them are a bit unpleasant.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.