A cheap entry into Industria de Diseño Textil, SA (BME:ITX) is unlikely

When almost half of the companies in Spain have a price-to-earnings ratio (P/E) of less than 19x, you can consider Industria de Design Textile, SA (BME:ITX) is a stock that may be worth avoiding with its P/E ratio of 27.9. Still, we would have to dig a little deeper to determine if there is a rational basis for the elevated P/E ratio.

The recent past has been favorable for Industria de Diseño Textil, with the company’s earnings growing faster than most. The P/E ratio is probably so high because investors expect this strong earnings performance to continue. If not, existing shareholders may be a little nervous about the future viability of the share price.

Check out our latest analysis for Industria de Diseño Textil

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How is Industria de Diseño Textil growing?

Industria de Diseño Textil’s P/E ratio would be typical of a company expected to deliver solid growth and, more importantly, outperform the market.

First, if we look back, we can see that the company grew its earnings per share by an impressive 21% last year. Over the last three-year period, earnings per share also grew by an excellent 185%, helped by short-term performance. Accordingly, shareholders would likely have welcomed these medium-term earnings growth rates.

Looking ahead, analysts covering the company expect earnings to grow at 9.4% per year over the next three years. With the market expected to grow at 15% each year, the company can expect weaker earnings.

With that in mind, it’s alarming that Industria de Diseño Textil’s P/E ratio is higher than most other companies. It seems that most investors are hoping for a turnaround in the company’s business prospects, but analysts aren’t so confident that this will happen. There’s a good chance that these shareholders are setting themselves up for future disappointment if the P/E ratio falls to a level more in line with the growth prospects.

The conclusion on the P/E ratio of Industria de Diseño Textil

In our view, the price-earnings ratio is not primarily used as a valuation tool, but rather to assess current investor sentiment and future expectations.

Our study of analyst forecasts for Industria de Diseño Textil found that the poor earnings outlook is not affecting the high P/E nearly as much as we would have expected. At the moment, the high P/E is making us increasingly uneasy, as forecast future earnings are unlikely to sustain such positive sentiment for long. This puts shareholders’ investments at significant risk, and potential investors risk paying an inflated premium.

Don’t forget that there may be other risks as well. For example, we have found 1 warning sign for Industria de Diseño Textil that you should know.

Naturally, You may also be able to find a better stock than Industria de Diseño Textil. You may want to see this free Collection of other companies that have reasonable P/E ratios and strong earnings growth.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.