Societatea de Constructii Napoca SA's (BVB:NAPO) Popularity With Investors Under Threat As Stock Sinks 31%

Societatea de Constructii Napoca SA (BVB:NAPO) shares have had a horrible month, losing 31% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 24% in that time.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Societatea de Constructii Napoca's P/E ratio of 15.1x, since the median price-to-earnings (or "P/E") ratio in Romania is also close to 15x. 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.

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With earnings growth that's exceedingly strong of late, Societatea de Constructii Napoca has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Societatea de Constructii Napoca

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Societatea de Constructii Napoca will help you shine a light on its historical performance.

Does Growth Match The P/E?

In order to justify its P/E ratio, Societatea de Constructii Napoca would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 114%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 30% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Societatea de Constructii Napoca's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

Societatea de Constructii Napoca's plummeting stock price has brought its P/E right back to the rest of the market. 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 Societatea de Constructii Napoca revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Societatea de Constructii Napoca you should know about.

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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.