S.C. Upet S.A. (BVB:UPET) Soars 28% But It's A Story Of Risk Vs Reward

S.C. Upet S.A. (BVB:UPET) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 22% is also fairly reasonable.

In spite of the firm bounce in price, there still wouldn't be many who think S.C. Upet's price-to-earnings (or "P/E") ratio of 12.3x is worth a mention when the median P/E in Romania is similar at about 13x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

S.C. Upet has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Check out our latest analysis for S.C. Upet

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

How Is S.C. Upet's Growth Trending?

In order to justify its P/E ratio, S.C. Upet would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 22%. EPS has also lifted 24% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 6.2% shows it's a great look while it lasts.

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

The Final Word

S.C. Upet's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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. Upet revealed its growing earnings over the medium-term aren't contributing to its P/E as much as we would have predicted, given the market is set to shrink. There could be some 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. It appears some are indeed anticipating earnings instability, because this relative performance should normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for S.C. Upet (of which 2 can't be ignored!) you should know about.

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