Good growth for Lavena AD (BUL:LAV) underpins its share price

When almost half of the companies in Bulgaria have a price-to-earnings (or “P/E”) ratio of over 18x, you might think about it Lavena AD (BUL:LAV) as an extremely attractive investment with a P/E ratio of 5.6x. However, the P/E ratio could be quite low for a reason and further research is needed to determine whether it is justified.

Lavena AD has definitely been doing a great job recently and increasing its profits very quickly. One possibility is that the P/E ratio is low because investors believe that this strong earnings growth could actually underperform the broader market in the near term. If this is not the case, existing shareholders have reason to be quite optimistic about the future development of the share price.

Check out our latest analysis for Lavena AD

Would you like to get a complete overview of the company’s profits, sales and cash flow? Then ours free The Lavena AD report will help you gain insight into its historical performance.

What do growth metrics tell us about the low P/E ratio?

To justify its P/E ratio, Lavena AD would have to deliver meager growth that significantly underperforms the market.

If we review the last year of earnings growth, the company posted a whopping increase of 34%. As a result, the company also grew earnings per share by a total of 28% over the past three years. So we can first confirm that the company has indeed done a good job of growing earnings over this period.

This is in contrast to the rest of the market, which is expected to grow by 21% next year, well above the company’s recent medium-term annual growth rates.

With this in mind, it’s understandable that Lavena AD’s P/E ratio is lower than most other companies. Apparently many shareholders didn’t feel comfortable holding on to something that they believe continues to underperform the stock market.

What can we learn from Lavena AD’s P/E ratio?

While the price-to-earnings ratio shouldn’t be the deciding factor in whether or not you buy a stock, it is still a useful barometer of earnings expectations.

We noted that Lavena AD maintains its low P/E ratio and is below the broader market forecast, as expected, due to weakness in its recent three-year growth. For now, shareholders accept the low P/E ratio, acknowledging that future earnings are unlikely to hold any pleasant surprises. Under these circumstances, if recent medium-term earnings trends continue, it is unlikely that the share price will rise sharply in the near future.

It’s also worth noting what we found 3 warning signs for Lavena AD (2 make us uncomfortable!) that you need to consider.

If you are interested in P/E ratiosmaybe you would like to see this free Collection of other companies with strong earnings growth and low P/E ratios.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.