With a median price-to-earnings (or "P/E") ratio of close to 15x in the Netherlands, you could be forgiven for feeling indifferent about Koninklijke KPN N.V.'s (AMS:KPN) P/E ratio of 16.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Koninklijke KPN hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.
View our latest analysis for Koninklijke KPN
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Is There Some Growth For Koninklijke KPN?
Koninklijke KPN's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 44%. Even so, admirably EPS has lifted 60% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Turning to the outlook, the next three years should generate growth of 4.7% each year as estimated by the analysts watching the company. With the market predicted to deliver 5.9% growth each year, the company is positioned for a comparable earnings result.
In light of this, it's understandable that Koninklijke KPN's P/E sits in line with the majority of other companies. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.
The Key Takeaway
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Koninklijke KPN's analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless these conditions change, they will continue to support the share price at these levels.
And what about other risks? Every company has them, and we've spotted 3 warning signs for Koninklijke KPN you should know about.
If these risks are making you reconsider your opinion on Koninklijke KPN, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.
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