What CEZ, a. s.'s (SEP:CEZ) P/E Is Not Telling You

CEZ, a. s.'s (SEP:CEZ) price-to-earnings (or "P/E") ratio of 17.2x might make it look like a sell right now compared to the market in Czech Republic, where around half of the companies have P/E ratios below 12x and even P/E's below 10x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

CEZ a. s hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for CEZ a. s

If you'd like to see what analysts are forecasting going forward, you should check out our free report on CEZ a. s.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like CEZ a. s' to be considered reasonable.

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 59%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 3.9% each year during the coming three years according to the eight analysts following the company. With the market predicted to deliver 14% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that CEZ a. s is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Final Word

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 CEZ a. 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. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with CEZ a. s (at least 1 which is concerning), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on CEZ a. s, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.