SALUS, Ljubljana, d. d.'s (LJSE:SALR) 29% Jump Shows Its Popularity With Investors

SALUS, Ljubljana, d. d. (LJSE:SALR) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last month tops off a massive increase of 105% in the last year.

Since its price has surged higher, given close to half the companies in Slovenia have price-to-earnings ratios (or "P/E's") below 9x, you may consider SALUS Ljubljana d. d as a stock to avoid entirely with its 30.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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As an illustration, earnings have deteriorated at SALUS Ljubljana d. d 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 SALUS Ljubljana d. d

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

How Is SALUS Ljubljana d. d's Growth Trending?

SALUS Ljubljana d. d'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.

Retrospectively, the last year delivered a frustrating 19% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 18% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

In contrast to the company, the rest of the market is expected to decline by 3.4% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this information, we can see why SALUS Ljubljana d. d is trading at a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.

The Final Word

The strong share price surge has got SALUS Ljubljana d. d's P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of SALUS Ljubljana d. d revealed its growing earnings over the medium-term are contributing to its high P/E, given the market is set to shrink. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with SALUS Ljubljana d. d, and understanding should be part of your investment process.

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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.