What You Can Learn From Ponsse Oyj's (HEL:PON1V) P/E

Explore Ponsse Oyj's Fair Values from the Community and select yours

When close to half the companies in Finland have price-to-earnings ratios (or "P/E's") below 20x, you may consider Ponsse Oyj (HEL:PON1V) as a stock to potentially avoid with its 27.5x P/E ratio. 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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Recent times have been pleasing for Ponsse Oyj as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Ponsse Oyj

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Ponsse Oyj would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 144% last year. Still, incredibly EPS has fallen 19% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 25% per year as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 15% per annum, which is noticeably less attractive.

With this information, we can see why Ponsse Oyj is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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.

We've established that Ponsse Oyj maintains its high P/E on the strength of its forecast growth being higher than the wider market, 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. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Ponsse Oyj with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Ponsse Oyj. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.