The Market Doesn't Like What It Sees From Lion Capital S.A.'s (BVB:LION) Earnings Yet

Lion Capital S.A.'s (BVB:LION) price-to-earnings (or "P/E") ratio of 3.5x might make it look like a strong buy right now compared to the market in Romania, where around half of the companies have P/E ratios above 16x and even P/E's above 37x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

The earnings growth achieved at Lion Capital over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Lion Capital

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

Is There Any Growth For Lion Capital?

The only time you'd be truly comfortable seeing a P/E as depressed as Lion Capital's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a decent 8.7% gain to the company's bottom line. Still, lamentably EPS has fallen 20% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for a contraction of 0.7% shows the market is more attractive on an annualised basis regardless.

In light of this, it's understandable that Lion Capital's P/E sits below the majority of other companies. However, when earnings shrink rapidly P/E often shrinks too, which could set up shareholders for future disappointment regardless. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability, which would be difficult to do with the current market outlook.

What We Can Learn From Lion Capital's 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.

As we suspected, our examination of Lion Capital revealed its sharp three-year contraction in earnings is contributing to its low P/E, given the market is set to shrink less severely. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. However, we're still cautious about the company's ability to prevent an acceleration of its recent medium-term course and resist even greater pain to its business from the broader market turmoil. In the meantime, unless the company's relative performance improves, the share price will hit a barrier around these levels.

You need to take note of risks, for example - Lion Capital has 2 warning signs (and 1 which is potentially serious) we think you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.