Nasdaq
华尔街日报Aroma AD's (BUL:AROM) Popularity With Investors Under Threat As Stock Sinks 53%
Aroma AD (BUL:AROM) shareholders won't be pleased to see that the share price has had a very rough month, dropping 53% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 24% in that time.
Even after such a large drop in price, given around half the companies in Bulgaria have price-to-earnings ratios (or "P/E's") below 25x, you may still consider Aroma AD as a stock to potentially avoid with its 32.3x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
For instance, Aroma AD's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Aroma AD
How Is Aroma AD's Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like Aroma AD's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 68% decrease to the company's bottom line. Even so, admirably EPS has lifted 59% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Comparing that to the market, which is predicted to deliver 21% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
In light of this, it's alarming that Aroma AD's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Key Takeaway
Despite the recent share price weakness, Aroma AD's P/E remains higher than most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Aroma AD currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Having said that, be aware Aroma AD is showing 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant.
You might be able to find a better investment than Aroma AD. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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.