Why Investors Shouldn't Be Surprised By Ingevec S.A.'s (SNSE:INGEVEC) 33% Share Price Surge

Ingevec S.A. (SNSE:INGEVEC) shares have continued their recent momentum with a 33% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 85%.

In spite of the firm bounce in price, there still wouldn't be many who think Ingevec's price-to-earnings (or "P/E") ratio of 8.6x is worth a mention when the median P/E in Chile is similar at about 10x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Earnings have risen firmly for Ingevec recently, which is pleasing to see. It might be that many expect the respectable earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

See our latest analysis for Ingevec

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Ingevec's earnings, revenue and cash flow.

How Is Ingevec's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Ingevec's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. Pleasingly, EPS has also lifted 32% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

It's interesting to note that the rest of the market is similarly expected to grow by 11% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we can see why Ingevec is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average growth rates continue into the future and are only willing to pay a moderate amount for the stock.

The Key Takeaway

Ingevec appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Ingevec revealed its three-year earnings trends are contributing to its P/E, given they look similar to current market expectations. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless the recent medium-term conditions change, they will continue to support the share price at these levels.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Ingevec that you should be aware of.

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

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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.