More Unpleasant Surprises Could Be In Store For Hydraulic Elements and Systems AD's (BUL:HES) Shares After Tumbling 47%

The Hydraulic Elements and Systems AD (BUL:HES) share price has fared very poorly over the last month, falling by a substantial 47%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 51% loss during that time.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Hydraulic Elements and Systems AD's P/E ratio of 10.1x, since the median price-to-earnings (or "P/E") ratio in Bulgaria is also close to 11x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Recent times have been quite advantageous for Hydraulic Elements and Systems AD as its earnings have been rising very briskly. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Hydraulic Elements and Systems AD

Although there are no analyst estimates available for Hydraulic Elements and Systems AD, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Hydraulic Elements and Systems AD's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 31% gain to the company's bottom line. Still, incredibly EPS has fallen 53% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 21% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Hydraulic Elements and Systems AD is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Hydraulic Elements and Systems AD's P/E?

With its share price falling into a hole, the P/E for Hydraulic Elements and Systems AD looks quite average now. 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.

Our examination of Hydraulic Elements and Systems AD revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Hydraulic Elements and Systems AD has 4 warning signs (and 2 which are a bit concerning) we think you should know about.

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.

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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.