Blue Cap AG's (ETR:B7E) price-to-earnings (or "P/E") ratio of 8.3x might make it look like a strong buy right now compared to the market in Germany, where around half of the companies have P/E ratios above 18x and even P/E's above 36x 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.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Blue Cap 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.
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How Is Blue Cap's Growth Trending?
In order to justify its P/E ratio, Blue Cap would need to produce anemic growth that's substantially trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 124% last year. The latest three year period has also seen an excellent 292% 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.
Looking ahead now, EPS is anticipated to slump, contracting by 16% each year during the coming three years according to the dual analysts following the company. Meanwhile, the broader market is forecast to expand by 16% each year, which paints a poor picture.
In light of this, it's understandable that Blue Cap's P/E would sit below the majority of other companies. 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 Key Takeaway
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.
We've established that Blue Cap 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.