Nasdaq
华尔街日报Sopharma AD (BUL:SFA) Looks Inexpensive After Falling 48% But Perhaps Not Attractive Enough
The Sopharma AD (BUL:SFA) share price has fared very poorly over the last month, falling by a substantial 48%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 25% share price drop.
After such a large drop in price, given about half the companies in Bulgaria have price-to-earnings ratios (or "P/E's") above 12x, you may consider Sopharma AD as an attractive investment with its 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.
With earnings growth that's exceedingly strong of late, Sopharma AD has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Check out our latest analysis for Sopharma AD
What Are Growth Metrics Telling Us About The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Sopharma AD's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered an exceptional 165% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 18% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's an unpleasant look.
With this information, we are not surprised that Sopharma AD is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. 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 Sopharma AD's P/E?
Sopharma AD's recently weak share price has pulled its P/E below most other companies. 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 Sopharma AD revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
There are also other vital risk factors to consider and we've discovered 4 warning signs for Sopharma AD (3 can't be ignored!) that you should be aware of before investing here.
If these risks are making you reconsider your opinion on Sopharma AD, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.