Investors Still Aren't Entirely Convinced By Befesa S.A.'s (ETR:BFSA) Earnings Despite 26% Price Jump

The Befesa S.A. (ETR:BFSA) share price has done very well over the last month, posting an excellent gain of 26%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.9% in the last twelve months.

Even after such a large jump in price, there still wouldn't be many who think Befesa's price-to-earnings (or "P/E") ratio of 18.5x is worth a mention when the median P/E in Germany is similar at about 19x. 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.

We've discovered 2 warning signs about Befesa. View them for free.

Recent times have been advantageous for Befesa as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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Is There Some Growth For Befesa?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 43% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 21% per year as estimated by the ten analysts watching the company. That's shaping up to be materially higher than the 17% per year growth forecast for the broader market.

In light of this, it's curious that Befesa's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

Its shares have lifted substantially and now Befesa's P/E is also back up to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Befesa's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Befesa that you need to be mindful of.

If you're unsure about the strength of Befesa'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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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.