Arvida Group Limited's (NZSE:ARV) Share Price Boosted 76% But Its Business Prospects Need A Lift Too

The Arvida Group Limited (NZSE:ARV) share price has done very well over the last month, posting an excellent gain of 76%. The last 30 days bring the annual gain to a very sharp 29%.

Although its price has surged higher, Arvida Group may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.5x, since almost half of all companies in New Zealand have P/E ratios greater than 18x and even P/E's higher than 31x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Arvida Group as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Arvida Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Arvida Group.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Arvida Group's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 21% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.7% per annum as estimated by the four analysts watching the company. Meanwhile, the broader market is forecast to expand by 19% per year, which paints a poor picture.

With this information, we are not surprised that Arvida Group is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Arvida Group's P/E

Even after such a strong price move, Arvida Group's P/E still trails the rest of the market significantly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Arvida Group's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Arvida Group (at least 2 which make us uncomfortable), and understanding them should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.