Investors Still Waiting For A Pull Back In S.C. Turism Covasna S.A. (BVB:TUAA)

S.C. Turism Covasna S.A.'s (BVB:TUAA) price-to-earnings (or "P/E") ratio of 46.5x might make it look like a strong sell right now compared to the market in Romania, where around half of the companies have P/E ratios below 13x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For example, consider that S.C. Turism Covasna's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for S.C. Turism Covasna

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. Turism Covasna's earnings, revenue and cash flow.

How Is S.C. Turism Covasna's Growth Trending?

S.C. Turism Covasna'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, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 68%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

In contrast to the company, the rest of the market is expected to decline by 4.7% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

In light of this, it's understandable that S.C. Turism Covasna's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse. Nonetheless, with most other businesses facing an uphill battle, staying on its current earnings path is no certainty.

The Key Takeaway

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 S.C. Turism Covasna maintains its high P/E on the strength of its recentthree-year growth beating forecasts for a struggling market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.

Plus, you should also learn about these 4 warning signs we've spotted with S.C. Turism Covasna (including 1 which shouldn't be ignored).

Of course, you might also be able to find a better stock than S.C. Turism Covasna. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.