S.N.T.G.N. Transgaz S.A. (BVB:TGN) Shares Fly 26% But Investors Aren't Buying For Growth

Explore S.N.T.G.N. Transgaz's Fair Values from the Community and select yours

Despite an already strong run, S.N.T.G.N. Transgaz S.A. (BVB:TGN) shares have been powering on, with a gain of 26% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 90% in the last year.

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.N.T.G.N. Transgaz as an attractive investment with its 12.6x 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.

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With its earnings growth in positive territory compared to the declining earnings of most other companies, S.N.T.G.N. Transgaz has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.

View our latest analysis for S.N.T.G.N. Transgaz

If you'd like to see what analysts are forecasting going forward, you should check out our free report on S.N.T.G.N. Transgaz.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, S.N.T.G.N. Transgaz 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 100% last year. The strong recent performance means it was also able to grow EPS by 129% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 1.1% per year during the coming three years according to the lone analyst following the company. That's not great when the rest of the market is expected to grow by 9.3% per year.

In light of this, it's understandable that S.N.T.G.N. Transgaz's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From S.N.T.G.N. Transgaz's P/E?

The latest share price surge wasn't enough to lift S.N.T.G.N. Transgaz's P/E close to the market median. 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.

As we suspected, our examination of S.N.T.G.N. Transgaz's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for S.N.T.G.N. Transgaz that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.