Why Investors Shouldn't Be Surprised By Ponsse Oyj's (HEL:PON1V) 26% Share Price Surge

Ponsse Oyj (HEL:PON1V) shareholders have had their patience rewarded with a 26% share price jump in the last month. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

After such a large jump in price, given close to half the companies in Finland have price-to-earnings ratios (or "P/E's") below 19x, you may consider Ponsse Oyj as a stock to avoid entirely with its 58.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Ponsse Oyj has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View 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.

What Are Growth Metrics Telling Us About The High P/E?

Ponsse Oyj's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

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 58%. The last three years don't look nice either as the company has shrunk EPS by 64% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 68% each year during the coming three years according to the three analysts following the company. With the market only predicted to deliver 14% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Ponsse Oyj's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Ponsse Oyj's P/E?

Ponsse Oyj's P/E is flying high just like its stock has during the last month. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Ponsse Oyj you should be aware of.

You might be able to find a better investment than Ponsse Oyj. 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.