S.C. Turism Covasna S.A.'s (BVB:TUAA) Earnings Haven't Escaped The Attention Of Investors

When close to half the companies in Romania have price-to-earnings ratios (or "P/E's") below 15x, you may consider S.C. Turism Covasna S.A. (BVB:TUAA) as a stock to avoid entirely with its 31.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's exceedingly strong of late, S.C. Turism Covasna has been doing very well. 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.

Check out 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.

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

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.

If we review the last year of earnings growth, the company posted a terrific increase of 80%. 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 the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 2.6% shows it's a great look while it lasts.

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. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.

The Key Takeaway

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. Turism Covasna maintains its high P/E on the strength of its recentthree-year growth beating forecasts for a struggling market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Although, if the company's relative performance doesn't change it will continue to provide strong support to the share price.

Having said that, be aware S.C. Turism Covasna is showing 4 warning signs in our investment analysis, and 1 of those is concerning.

If you're unsure about the strength of S.C. Turism Covasna'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.