S.C. Mecanica Codlea S.A. (BVB:MEOY) Soars 25% But It's A Story Of Risk Vs Reward

Those holding S.C. Mecanica Codlea S.A. (BVB:MEOY) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Although its price has surged higher, given about half the companies in Romania have price-to-earnings ratios (or "P/E's") above 16x, you may still consider S.C. Mecanica Codlea as an attractive investment with its 10.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

S.C. Mecanica Codlea certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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.

Check out our latest analysis for S.C. Mecanica Codlea

Although there are no analyst estimates available for S.C. Mecanica Codlea, 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 S.C. Mecanica Codlea?

In order to justify its P/E ratio, S.C. Mecanica Codlea would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 420% last year. The strong recent performance means it was also able to grow EPS by 636% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is predicted to shrink 10% in the next 12 months, the company's positive momentum based on recent medium-term earnings results is a bright spot for the moment.

With this information, we find it very odd that S.C. Mecanica Codlea 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 Bottom Line On S.C. Mecanica Codlea's P/E

S.C. Mecanica Codlea's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

Our examination of S.C. Mecanica Codlea 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. We think potential risks might be placing significant pressure on the P/E ratio and share price. 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. It appears many are indeed anticipating earnings instability, because this relative performance should normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 4 warning signs for S.C. Mecanica Codlea you should be aware of, and 3 of them are a bit concerning.

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.