Newlat Food S.p.A. (BIT:NWL) Stock Rockets 31% As Investors Are Less Pessimistic Than Expected

Newlat Food S.p.A. (BIT:NWL) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 44%.

Since its price has surged higher, Newlat Food's price-to-earnings (or "P/E") ratio of 25.6x 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 8x 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.

With earnings growth that's superior to most other companies of late, Newlat Food has been doing relatively well. 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.

View our latest analysis for Newlat Food

Keen to find out how analysts think Newlat Food's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Newlat Food's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 15% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 67% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 10% per year as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 17% each year, which is noticeably more attractive.

In light of this, it's alarming that Newlat Food's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

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

We've established that Newlat Food currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Newlat Food is showing 1 warning sign in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.