NOS, S.G.P.S., S.A. (ELI:NOS) Surges 27% Yet Its Low P/E Is No Reason For Excitement

The NOS, S.G.P.S., S.A. (ELI:NOS) share price has done very well over the last month, posting an excellent gain of 27%. The last 30 days bring the annual gain to a very sharp 33%.

Even after such a large jump in price, NOS S.G.P.S may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.6x, since almost half of all companies in Portugal have P/E ratios greater than 13x and even P/E's higher than 24x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for NOS S.G.P.S as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for NOS S.G.P.S

If you'd like to see what analysts are forecasting going forward, you should check out our free report on NOS S.G.P.S.

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

The only time you'd be truly comfortable seeing a P/E as low as NOS S.G.P.S' is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 61% last year. The strong recent performance means it was also able to grow EPS by 102% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 22% per year as estimated by the ten analysts watching the company. With the market predicted to deliver 4.6% growth per annum, that's a disappointing outcome.

In light of this, it's understandable that NOS S.G.P.S' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Despite NOS S.G.P.S' shares building up a head of steam, its P/E still lags most other companies. 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 NOS S.G.P.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. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with NOS S.G.P.S (at least 1 which shouldn't be ignored), and understanding these should be part of your investment process.

If you're unsure about the strength of NOS S.G.P.S' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.