When close to half the companies in Chile have price-to-earnings ratios (or "P/E's") below 13x, you may consider Nibsa S.A. (SNSE:NIBSA) as a stock to avoid entirely with its 23.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
With earnings growth that's exceedingly strong of late, Nibsa has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Nibsa
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Nibsa would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered an exceptional 338% gain to the company's bottom line. The latest three year period has also seen a 24% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
This is in contrast to the rest of the market, which is expected to grow by 13% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's alarming that Nibsa's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Nibsa revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Nibsa (at least 1 which is a bit concerning), and understanding them should be part of your investment process.
If you're unsure about the strength of Nibsa's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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