Why We're Not Concerned Yet About S.C. Mecanica Codlea S.A.'s (BVB:MEOY) 27% Share Price Plunge

The S.C. Mecanica Codlea S.A. (BVB:MEOY) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. The good news is that in the last year, the stock has shone bright like a diamond, gaining 100%.

Although its price has dipped substantially, S.C. Mecanica Codlea may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 79x, since almost half of all companies in Romania have P/E ratios under 15x and even P/E's lower than 8x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

As an illustration, earnings have deteriorated at S.C. Mecanica Codlea over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for S.C. Mecanica Codlea

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. Mecanica Codlea's earnings, revenue and cash flow.

Is There Enough Growth For S.C. Mecanica Codlea?

S.C. Mecanica Codlea's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 62%. Still, the latest three year period has seen an excellent 701% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 15% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that S.C. Mecanica Codlea's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On S.C. Mecanica Codlea's P/E

Even after such a strong price drop, S.C. Mecanica Codlea's P/E still exceeds the rest of the market significantly. 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.

We've established that S.C. Mecanica Codlea maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 5 warning signs we've spotted with S.C. Mecanica Codlea (including 3 which don't sit too well with us).

Of course, you might also be able to find a better stock than S.C. Mecanica Codlea. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.