Instone Real Estate Group SE (ETR:INS) shareholders are no doubt pleased to see that the share price has rebounded 30% in the past month, although it is still struggling to make up for recently lost ground. Yet the 30-day jump doesn’t change the fact that longer-term shareholders have seen their shares decimated by the 63% drop in share price over the past twelve months.

Even after such a strong price rally, Instone Real Estate Group’s 4.9x price-to-earnings (or “P/E”) ratio might still make it look like a solid buy right now relative to the German market, where about half of companies have P/E ratios above 16x and even P/E above 28x is quite common. Nevertheless, we would need to dig a little deeper to determine if there is a rational basis for the sharply reduced P/E.

With earnings growth outpacing most other companies lately, Instone Real Estate Group is doing relatively well. One possibility is that the P/E is weak because investors believe this strong earnings performance may be less impressive going forward. If not, existing shareholders have reason to be quite optimistic about the future direction of the stock price.

See our latest analysis for Instone Real Estate Group

If you want to see what analysts predict for the future, you should check out our free report on the real estate group Instone.

Is there growth for Instone Real Estate Group?

There is an inherent assumption that a company would have to significantly underperform the market for P/E ratios like Instone Real Estate Group’s to be considered reasonable.

Looking back, last year generated an exceptional gain of 96% on the company’s bottom line. The strong recent performance means it was also able to increase EPS by 76% in total over the past three years. Therefore, it’s fair to say that recent earnings growth has been superb for the company.

Looking ahead, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, down 3.6% annually over the next three years. With a market expected to grow by 14% each year, this is a disappointing result.

The story continues

With this information, we are not surprised that Instone Real Estate Group is trading at a lower P/E than the market. Nonetheless, there is no guarantee that the P/E has bottomed yet with earnings reversing. Even simply maintaining these prices could be difficult to achieve as the weak outlook weighs on equities.

The Basics of Instone Real Estate Group’s P/E

Even after such a price move, Instone Real Estate Group’s P/E still lags the rest of the market. We would argue that the power of the P/E ratio is not primarily a valuation tool, but rather to gauge current investor sentiment and future expectations.

We have established that Instone Real Estate Group maintains its low P/E on the weakness of its declining earnings forecast, as expected. At this point, investors believe that the potential for earnings improvement is not enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to act as a barrier to the stock price around these levels.

That said, know Instone Real Estate Group shows 3 warning signs in our investment analysis, and 1 of them is a little unpleasant.

If you are interested in P/E ratiosyou might want to see this free collection of other companies that have increased earnings sharply and are trading at P/Es below 20x.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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