There's Reason For Concern Over N. Varveris-Moda Bagno S.A.'s (ATH:MODA) Massive 32% Price Jump

Despite an already strong run, N. Varveris-Moda Bagno S.A. (ATH:MODA) shares have been powering on, with a gain of 32% in the last thirty days. The last month tops off a massive increase of 195% in the last year.

Since its price has surged higher, given around half the companies in Greece have price-to-earnings ratios (or "P/E's") below 12x, you may consider N. Varveris-Moda Bagno as a stock to potentially avoid with its 17.7x 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 as high as it is.

Earnings have risen firmly for N. Varveris-Moda Bagno recently, which is pleasing to see. It might be that many expect the respectable 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 may be a little nervous about the viability of the share price.

Check out our latest analysis for N. Varveris-Moda Bagno

Although there are no analyst estimates available for N. Varveris-Moda Bagno, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, N. Varveris-Moda Bagno would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 15% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 9.4% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that N. Varveris-Moda Bagno'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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

The large bounce in N. Varveris-Moda Bagno's shares has lifted the company's P/E to a fairly high level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of N. Varveris-Moda Bagno 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. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for N. Varveris-Moda Bagno (of which 1 makes us a bit uncomfortable!) you should know about.

If you're unsure about the strength of N. Varveris-Moda Bagno'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.