Market Participants Recognise Wärtsilä Oyj Abp's (HEL:WRT1V) Earnings Pushing Shares 25% Higher

The Wärtsilä Oyj Abp (HEL:WRT1V) share price has done very well over the last month, posting an excellent gain of 25%. Looking back a bit further, it's encouraging to see the stock is up 77% in the last year.

Following the firm bounce in price, Wärtsilä Oyj Abp's price-to-earnings (or "P/E") ratio of 39x might make it look like a strong sell right now compared to the market in Finland, where around half of the companies have P/E ratios below 18x and even P/E's below 12x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Wärtsilä Oyj Abp 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Wärtsilä Oyj Abp

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Wärtsilä Oyj Abp would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 119% gain to the company's bottom line. Pleasingly, EPS has also lifted 126% 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.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 28% per annum over the next three years. With the market only predicted to deliver 16% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Wärtsilä Oyj Abp 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 Key Takeaway

The strong share price surge has got Wärtsilä Oyj Abp's P/E rushing to great heights as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Wärtsilä Oyj Abp maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Wärtsilä Oyj Abp with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.