With a price-to-earnings (or “P/E”) ratio of 16.7x Krynica Vitamin S.A. (WSE:KVT) may be sending bearish signals at the moment, given that almost half of all companies in Poland have P/E ratios under 12x and even P/E’s lower than 7x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it’s justified.
With earnings growth that’s exceedingly strong of late, Krynica Vitamin has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.free report on Krynica Vitamin will help you shine a light on its historical performance.
What Are Growth Metrics Telling Us About The High P/E?
There’s an inherent assumption that a company should outperform the market for P/E ratios like Krynica Vitamin’s to be considered reasonable.
Retrospectively, the last year delivered an exceptional 88% gain to the company’s bottom line. Pleasingly, EPS has also lifted 565% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Weighing that recent medium-term earnings trajectory against the broader market’s one-year forecast for expansion of 4.6% shows it’s noticeably more attractive on an annualised basis.
In light of this, it’s understandable that Krynica Vitamin’s P/E sits above the majority of other companies. Presumably shareholders aren’t keen to offload something they believe will continue to outmanoeuvre the bourse.
What We Can Learn From Krynica Vitamin’s P/E?
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.
We’ve established that Krynica Vitamin maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it’s hard to see the share price falling strongly in the near future under these circumstances.
You need to take note of risks, for example – Krynica Vitamin has 5 warning signs (and 1 which is a bit concerning) we think you should know about.
You might be able to find a better investment than Krynica Vitamin. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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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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