Avio S.p.A.'s (BIT:AVIO) 25% Jump Shows Its Popularity With Investors

Despite an already strong run, Avio S.p.A. (BIT:AVIO) shares have been powering on, with a gain of 25% in the last thirty days. The annual gain comes to 109% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Avio's price-to-earnings (or "P/E") ratio of 48.9x might make it look like a strong sell right now compared to the market in Italy, where around half of the companies have P/E ratios below 14x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Avio certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Avio

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What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Avio would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 81%. The strong recent performance means it was also able to grow EPS by 193% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 18% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 14% each year, which is noticeably less attractive.

With this information, we can see why Avio is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Avio's P/E

Shares in Avio have built up some good momentum lately, which has really inflated its P/E. 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.

We've established that Avio maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 2 warning signs for Avio (1 doesn't sit too well with us!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Avio. 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.