Traton SE (ETR:8TRA) Screens Well But There Might Be A Catch
With a price-to-earnings (or "P/E") ratio of 8.6x Traton SE (ETR:8TRA) may be sending very bullish signals at the moment, given that almost half of all companies in Germany have P/E ratios greater than 19x and even P/E's higher than 35x 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.
While the market has experienced earnings growth lately, Traton'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 you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
View our latest analysis for Traton
Does Growth Match The Low P/E?
In order to justify its P/E ratio, Traton would need to produce anemic growth that's substantially trailing the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 31%. Even so, admirably EPS has lifted 295% in aggregate from three years ago, notwithstanding the last 12 months. 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 climb by 19% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 17% each year, which is not materially different.
In light of this, it's peculiar that Traton's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
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.
Our examination of Traton's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Traton (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.
Of course, you might also be able to find a better stock than Traton. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.