S.C. Independenta S.A.'s (BVB:INTA) 30% Price Boost Is Out Of Tune With Earnings

S.C. Independenta S.A. (BVB:INTA) shares have had a really impressive month, gaining 30% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 25%.

Since its price has surged higher, S.C. Independenta may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 25.7x, since almost half of all companies in Romania have P/E ratios under 14x and even P/E's lower than 7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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S.C. Independenta certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for S.C. Independenta

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on S.C. Independenta's earnings, revenue and cash flow.

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

S.C. Independenta's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 65% last year. Still, incredibly EPS has fallen 8.2% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

It's interesting to note that the rest of the market is similarly expected to decline by 3.7% over the next year, which is just as bad as the company's recent medium-term earnings decline.

In light of this, it's somewhat peculiar that S.C. Independenta's P/E sits above the majority of other companies. In general, shrinking earnings are unlikely to make the P/E premium sustainable, which could set up shareholders for future disappointment. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Key Takeaway

S.C. Independenta's P/E is flying high just like its stock has during the last month. 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.

Our examination of S.C. Independenta revealed its three-year contraction in earnings isn't impacting its high P/E as much as we would have predicted, given the market is set to shrink at a similar rate. When we see average earnings, we suspect the share price is at risk of declining, sending the high P/E lower. We're also cautious about the company's ability to stay its recent medium-term course and resist further pain to its business from the broader market turmoil. Unless the company's relative performance improves, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 3 warning signs we've spotted with S.C. Independenta (including 1 which is significant).

If these risks are making you reconsider your opinion on S.C. Independenta, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.