Improved Earnings Required Before S.N. Nuclearelectrica S.A. (BVB:SNN) Shares Find Their Feet

S.N. Nuclearelectrica S.A.'s (BVB:SNN) price-to-earnings (or "P/E") ratio of 7.2x might make it look like a strong buy right now compared to the market in Romania, where around half of the companies have P/E ratios above 15x and even P/E's above 38x are quite common. 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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While the market has experienced earnings growth lately, S.N. Nuclearelectrica's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like S.N. Nuclearelectrica's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 32%. Still, the latest three year period has seen an excellent 63% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to slump, contracting by 41% per year during the coming three years according to the three analysts following the company. That's not great when the rest of the market is expected to grow by 1.3% per year.

In light of this, it's understandable that S.N. Nuclearelectrica's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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 S.N. Nuclearelectrica maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

Plus, you should also learn about this 1 warning sign we've spotted with S.N. Nuclearelectrica.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.