Farminveste, S.G.P.S., S.A. (ELI:MLFMV) Soars 93% But It's A Story Of Risk Vs Reward

Farminveste, S.G.P.S., S.A. (ELI:MLFMV) shares have had a really impressive month, gaining 93% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 41%.

Although its price has surged higher, Farminveste S.G.P.S' price-to-earnings (or "P/E") ratio of 4.3x might still make it look like a strong buy right now compared to the market in Portugal, where around half of the companies have P/E ratios above 13x and even P/E's above 22x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings growth that's exceedingly strong of late, Farminveste S.G.P.S has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.

Check out our latest analysis for Farminveste S.G.P.S

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Farminveste S.G.P.S will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Farminveste S.G.P.S would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 99% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

In contrast to the company, the rest of the market is expected to decline by 1.6% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this information, we find it very odd that Farminveste S.G.P.S is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can maintain its recent positive growth rate in the face of a shrinking broader market.

The Final Word

Farminveste S.G.P.S' recent share price jump still sees its P/E sitting firmly flat on the ground. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Farminveste S.G.P.S currently trades on a much lower than expected P/E since its recent three-year earnings growth is beating forecasts for a struggling market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. Perhaps there is some hesitation about the company's ability to stay its recent course and swim against the current of the broader market turmoil. At least the risk of a price drop looks to be subdued, but investors think future earnings could see a lot of volatility.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Farminveste S.G.P.S (2 are concerning!) that you should be aware of before investing here.

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.