Wagners Holding Company Limited's (ASX:WGN) Shares Climb 26% But Its Business Is Yet to Catch Up

Despite an already strong run, Wagners Holding Company Limited (ASX:WGN) shares have been powering on, with a gain of 26% in the last thirty days. The annual gain comes to 219% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Wagners Holding may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 22.8x, since almost half of all companies in Australia have P/E ratios under 18x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Wagners Holding certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Wagners Holding

Keen to find out how analysts think Wagners Holding's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Wagners Holding's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 195% gain to the company's bottom line. The latest three year period has also seen an excellent 48% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 9.9% each year over the next three years. That's shaping up to be materially lower than the 15% each year growth forecast for the broader market.

With this information, we find it concerning that Wagners Holding is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Wagners Holding's P/E

Wagners Holding shares have received a push in the right direction, but its P/E is elevated too. 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 Wagners Holding's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Wagners Holding with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Wagners Holding. 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).

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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.