It's not a stretch to say that Ferretti S.p.A.'s (HKG:9638) price-to-earnings (or "P/E") ratio of 10.1x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 10x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been advantageous for Ferretti as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

How Is Ferretti's Growth Trending?

The only time you'd be comfortable seeing a P/E like Ferretti's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 22%. The strong recent performance means it was also able to grow EPS by 32% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 9.1% each year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to expand by 12% each year, which is noticeably more attractive.

With this information, we find it interesting that Ferretti is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Our examination of Ferretti's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Ferretti (of which 1 is concerning!) you should know about.

Of course, you might also be able to find a better stock than Ferretti. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.