Why Investors Shouldn't Be Surprised By UPM-Kymmene Oyj's (HEL:UPM) P/E

When close to half the companies in Finland have price-to-earnings ratios (or "P/E's") below 18x, you may consider UPM-Kymmene Oyj (HEL:UPM) as a stock to potentially avoid with its 25.1x 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.

With earnings that are retreating more than the market's of late, UPM-Kymmene 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. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for UPM-Kymmene Oyj

Keen to find out how analysts think UPM-Kymmene Oyj's future stacks up against the industry? In that case, our free report is a great place to start.

How Is UPM-Kymmene Oyj's Growth Trending?

UPM-Kymmene Oyj's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 47% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 14% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 30% per year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 16% each year growth forecast for the broader market.

In light of this, it's understandable that UPM-Kymmene Oyj's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On UPM-Kymmene Oyj's P/E

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 UPM-Kymmene Oyj 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. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware UPM-Kymmene Oyj is showing 3 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than UPM-Kymmene 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.