Somero Enterprises, Inc. (LON:SOM) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 46% in the last year.
In spite of the firm bounce in price, Somero Enterprises may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.9x, since almost half of all companies in the United Kingdom have P/E ratios greater than 18x and even P/E's higher than 37x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
For instance, Somero Enterprises' receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
Although there are no analyst estimates available for Somero Enterprises, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is Somero Enterprises' Growth Trending?
Somero Enterprises' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 1.2%. Regardless, EPS has managed to lift by a handy 9.5% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
It's interesting to note that the rest of the market is similarly expected to grow by 2.7% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.
With this information, we find it odd that Somero Enterprises is trading at a P/E lower than the market. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.
What We Can Learn From Somero Enterprises' P/E?
The latest share price surge wasn't enough to lift Somero Enterprises' P/E close to the market median. 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 Somero Enterprises revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.
Before you settle on your opinion, we've discovered 2 warning signs for Somero Enterprises that you should be aware of.
If you're unsure about the strength of Somero Enterprises' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
This article by Simply Wall St is general in nature. 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.
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