Earnings Not Telling The Story For Organización Cultiba, S.A.B. de C.V. (BMV:CULTIBAB) After Shares Rise 26%

Organización Cultiba, S.A.B. de C.V. (BMV:CULTIBAB) shareholders have had their patience rewarded with a 26% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 24% over that time.

Following the firm bounce in price, given close to half the companies in Mexico have price-to-earnings ratios (or "P/E's") below 14x, you may consider Organización Cultiba. de as a stock to avoid entirely with its 32.2x 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 so lofty.

As an illustration, earnings have deteriorated at Organización Cultiba. de over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Organización Cultiba. de

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

There's an inherent assumption that a company should far outperform the market for P/E ratios like Organización Cultiba. de's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 69%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 68% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

It's interesting to note that the rest of the market is similarly expected to grow by 17% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Organización Cultiba. de is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Shares in Organización Cultiba. de have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Organización Cultiba. de currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. When we see average earnings with market-like 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 risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 3 warning signs for Organización Cultiba. de that you need to take into consideration.

Of course, you might also be able to find a better stock than Organización Cultiba. de. So you may wish to see this free collection of other companies that sit on P/E's below 20x 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.