A Piece Of The Puzzle Missing From Ekotechnika AG's (ETR:ETE) 32% Share Price Climb

The Ekotechnika AG (ETR:ETE) share price has done very well over the last month, posting an excellent gain of 32%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 26% over that time.

Even after such a large jump in price, Ekotechnika may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 3.6x, since almost half of all companies in Germany have P/E ratios greater than 14x and even P/E's higher than 26x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Ekotechnika certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Ekotechnika

Although there are no analyst estimates available for Ekotechnika, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Ekotechnika's Growth Trending?

In order to justify its P/E ratio, Ekotechnika would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 49% gain to the company's bottom line. Pleasingly, EPS has also lifted 136% 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 10% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Ekotechnika's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Ekotechnika's P/E?

Shares in Ekotechnika are going to need a lot more upward momentum to get the company's P/E out of its slump. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Ekotechnika currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Ekotechnika, and understanding should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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.