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When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") above 18x, you may consider thyssenkrupp AG (ETR:TKA) as an attractive investment with its 13.8x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
thyssenkrupp has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
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What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like thyssenkrupp's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 64% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Turning to the outlook, the next three years should generate growth of 31% per year as estimated by the eight analysts watching the company. With the market only predicted to deliver 14% per year, the company is positioned for a stronger earnings result.
In light of this, it's peculiar that thyssenkrupp's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
What We Can Learn From thyssenkrupp's P/E?
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that thyssenkrupp currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.