Better Earnings Needed Before Melexis NV (EBR:MELE) Shares Gain Foothold

With a price-to-earnings ratio (or “P/E”) of 11.3x Melexis NV (EBR:MELE) may be sending bullish signals at the moment, as almost half of all companies in Belgium have a P/E ratio of more than 14x, and even P/E ratios of more than 26x are not uncommon. However, it is not advisable to simply take the P/E ratio at face value, as there may be an explanation as to why it is capped.

Melexis has not performed well recently, as its declining earnings compare poorly to other companies that have, on average, experienced some growth. The P/E ratio is probably low because investors believe this poor earnings performance isn’t going to get any better. If this is the case, existing shareholders will likely have difficulty getting excited about the future direction of the share price.

Check out our latest analysis for Melexis

Want a complete overview of analyst estimates for the company? Then ours free The Melexis report will help you figure out what’s on the horizon.

Does the growth correspond to the low P/E ratio?

A P/E ratio as low as Melexis’s can only really be considered pleasant if the company’s growth lags behind the market.

If we review the last year of earnings, the company’s earnings disappointingly fell by 4.1%. However, some very strong previous years meant the company was able to grow earnings per share by an impressive 67% overall over the last three years. While it’s been a bumpy road, it’s still fair to say that the recent earnings growth has been more than enough for the company.

Looking ahead, earnings per share are expected to grow 6.8% per year over the next three years, according to the 11 analysts covering the company. The rest of the market is forecast to grow at 11% annually, which is much more attractive.

With this information, we can see why Melexis is trading at a lower P/E than the market. It seems that most investors expect limited future growth and are only willing to pay a lower amount for the stock.

What can we learn from Melexis’ P/E ratio?

We would say that the price-to-earnings ratio is not primarily a valuation tool, but rather is used to measure current investor sentiment and future expectations.

We noted that Melexis maintains its low P/E ratio due to weakness in its forecast growth, which is expected to be lower than the overall market. For now, shareholders accept the low P/E ratio, acknowledging that future earnings are unlikely to hold any pleasant surprises. Unless these conditions improve, they will continue to act as a barrier to share price near these levels.

In addition, you should also find out about it 2 warning signs we spotted with Melexis.

It is important Make sure you’re looking for a great company and not just the first idea you come across. So take a look free List of interesting companies with strong recent earnings growth (and a low P/E ratio).

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute 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 focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.