Potential Upside For S.C. Petal S.A. (BVB:PETY) Not Without Risk

When close to half the companies in Romania have price-to-earnings ratios (or "P/E's") above 14x, you may consider S.C. Petal S.A. (BVB:PETY) as a highly attractive investment with its 3.8x 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 limited.

Recent times have been quite advantageous for S.C. Petal as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for S.C. Petal

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, S.C. Petal would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 105% last year. Pleasingly, EPS has also lifted 79% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to decline by 7.1% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this information, we find it very odd that S.C. Petal is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can maintain its recent positive growth rate in the face of a shrinking broader market.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of S.C. Petal revealed its growing earnings over the medium-term aren't contributing to its P/E anywhere near as much as we would have predicted, given the market is set to shrink. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. Perhaps there is some hesitation about the company's ability to stay its recent course and swim against the current of the broader market turmoil. At least the risk of a price drop looks to be subdued, but investors think future earnings could see a lot of volatility.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for S.C. Petal that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.