S.C. Metalul Mesa S.A. (BVB:MESA) Stock Rockets 29% As Investors Are Less Pessimistic Than Expected

S.C. Metalul Mesa S.A. (BVB:MESA) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

After such a large jump in price, S.C. Metalul Mesa may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 37.5x, since almost half of all companies in Romania have P/E ratios under 12x and even P/E's lower than 6x are not unusual. 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.

For instance, S.C. Metalul Mesa's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for S.C. Metalul Mesa

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. Metalul Mesa's earnings, revenue and cash flow.

How Is S.C. Metalul Mesa's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as S.C. Metalul Mesa's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 72%. As a result, earnings from three years ago have also fallen 70% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to decline by 6.2% over the next year, or less than the company's recent medium-term annualised earnings decline.

In light of this, it's odd that S.C. Metalul Mesa's P/E sits above the majority of other companies. In general, when earnings shrink rapidly the P/E premium often shrinks too, which could set up shareholders for future disappointment. Maintaining these prices will be extremely difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Bottom Line On S.C. Metalul Mesa's P/E

Shares in S.C. Metalul Mesa have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of S.C. Metalul Mesa revealed its sharp three-year contraction in earnings isn't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to shrink less severely. When we see below average earnings, we suspect the share price is at risk of declining, sending the high P/E lower. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough market conditions. Unless the company's relative performance improves markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 5 warning signs for S.C. Metalul Mesa (of which 3 are a bit concerning!) you should know about.

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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