Investors Give S.C. Caromet S.A. (BVB:ARMT) Shares A 26% Hiding

S.C. Caromet S.A. (BVB:ARMT) shares have had a horrible month, losing 26% after a relatively good period beforehand. The recent drop has obliterated the annual return, with the share price now down 4.8% over that longer period.

In spite of the heavy fall in price, there still wouldn't be many who think S.C. Caromet's price-to-earnings (or "P/E") ratio of 13x is worth a mention when the median P/E in Romania is similar at about 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

S.C. Caromet has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

See our latest analysis for S.C. Caromet

Although there are no analyst estimates available for S.C. Caromet, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is S.C. Caromet's Growth Trending?

The only time you'd be comfortable seeing a P/E like S.C. Caromet's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 23%. The latest three year period has also seen an excellent 2,237% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 4.7% shows it's a great look while it lasts.

In light of this, it's peculiar that S.C. Caromet's P/E sits in line with the majority of other companies. It looks like most investors are not convinced the company can maintain its recent positive growth rate in the face of a shrinking broader market.

The Final Word

Following S.C. Caromet's share price tumble, its P/E is now hanging on to the median market P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that S.C. Caromet currently trades on a lower than expected P/E since its recent three-year earnings growth is beating forecasts for a struggling market. There could be some 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. It appears some are indeed anticipating earnings instability, because this relative performance should normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for S.C. Caromet (of which 2 can't be ignored!) you should know about.

You might be able to find a better investment than S.C. Caromet. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.