Daimler Truck Holding AG (ETR:DTG) price-to-earnings (or “P/E”) ratio of 7.5 might make it seem like a strong buy at the moment, compared to the market in Germany, where about half of the companies have P/E ratios above 17x, and even P/E ratios above 33x are quite common. However, the P/E ratio might be quite low for a reason, and further research is needed to determine if it is justified.

Daimler Truck Holding has certainly done well recently, as the company has been able to grow its earnings faster than most. It could be that many are expecting the strong earnings performance to slow down significantly, which has pushed the P/E ratio down. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Does the growth match the low P/E ratio?

There is an assumption that a company must lag far behind the market for P/E ratios like Daimler Truck Holding’s to be considered reasonable.

If we look at the earnings growth over the last year, the company has seen a fantastic 19% increase. The last three-year period has also seen an excellent overall increase in earnings per share of 46%, helped by the short-term performance. Therefore, it is fair to say that the company’s earnings growth has been outstanding recently.

Looking ahead, analysts expect earnings to grow by 5.8% per year over the next three years, well below the 15% per year growth forecast for the overall market.

With this information, we can see why Daimler Truck Holding is trading at a lower P/E than the market. Apparently, many shareholders were uncomfortable holding on to their shares while the company may be facing a less successful future.

The most important things to take away

It is argued that the price-to-earnings ratio is not a good measure of a company’s value in certain industries, but can be a meaningful indicator of business sentiment.

As we suspected, our study of analyst forecasts for Daimler Truck Holding found that the weaker earnings outlook is contributing to the low P/E ratio. At this point, investors believe the potential for earnings improvement is not large enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to act as a barrier to the share price near these levels.

We don’t want to spoil the fun too much, but we also found 2 warning signals for Daimler Truck Holding (1 is worrying!) that you need to be aware of.

If you uncertain about the strength of Daimler Truck Holding’s businesswhy not explore our interactive stock list with solid business fundamentals for some other companies you may have missed.

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