Potential Upside For Transilvania Investments Alliance S.A. (BVB:TRANSI) Not Without Risk

Transilvania Investments Alliance S.A.'s (BVB:TRANSI) price-to-earnings (or "P/E") ratio of 3x 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 12x and even P/E's above 19x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Recent times have been quite advantageous for Transilvania Investments Alliance as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Transilvania Investments Alliance

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 Transilvania Investments Alliance's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Transilvania Investments Alliance's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 263%. The latest three year period has also seen an excellent 575% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 1.5% shows it's a great look while it lasts.

With this information, we find it very odd that Transilvania Investments Alliance is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Transilvania Investments Alliance currently trades on a much lower than expected P/E since its recent three-year earnings growth is beating forecasts for a struggling market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. At least the risk of a price drop looks to be subdued, but investors think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Transilvania Investments Alliance (at least 1 which is potentially serious), and understanding them should be part of your investment process.

You might be able to find a better investment than Transilvania Investments Alliance. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.