Sláturfélags Suðurlands svf.'s (ICE:SFS B) Share Price Boosted 44% But Its Business Prospects Need A Lift Too

Sláturfélags Suðurlands svf. (ICE:SFS B) shareholders would be excited to see that the share price has had a great month, posting a 44% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.4% over the last year.

In spite of the firm bounce in price, Sláturfélags Suðurlands svf may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 2x, since almost half of all companies in Iceland have P/E ratios greater than 16x and even P/E's higher than 21x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's exceedingly strong of late, Sláturfélags Suðurlands svf has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Sláturfélags Suðurlands svf

Although there are no analyst estimates available for Sláturfélags Suðurlands svf, 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 Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Sláturfélags Suðurlands svf's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 38% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 17% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that Sláturfélags Suðurlands svf's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Even after such a strong price move, Sláturfélags Suðurlands svf's P/E still trails the rest of the market significantly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Sláturfélags Suðurlands svf revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 4 warning signs for Sláturfélags Suðurlands svf you should be aware of, and 1 of them is a bit concerning.

If these risks are making you reconsider your opinion on Sláturfélags Suðurlands svf, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.