RWE Aktiengesellschaft's (ETR:RWE) Share Price Is Matching Sentiment Around Its Earnings

When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") above 20x, you may consider RWE Aktiengesellschaft (ETR:RWE) as a highly attractive investment with its 4.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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RWE 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 low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for RWE

If you'd like to see what analysts are forecasting going forward, you should check out our free report on RWE.

How Is RWE's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 239% gain to the company's bottom line. The latest three year period has also seen an excellent 555% overall rise in EPS, aided by its short-term performance. 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 25% per year as estimated by the analysts watching the company. With the market predicted to deliver 17% growth per annum, that's a disappointing outcome.

With this information, we are not surprised that RWE is trading at a P/E lower than the market. 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 Bottom Line On RWE's P/E

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 RWE 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You need to take note of risks, for example - RWE has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.