Automatyka-Pomiary-Sterowanie S.A.'s (WSE:APS) Shares Climb 26% But Its Business Is Yet to Catch Up

Automatyka-Pomiary-Sterowanie S.A. (WSE:APS) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 58% in the last year.

Since its price has surged higher, given around half the companies in Poland have price-to-earnings ratios (or "P/E's") below 12x, you may consider Automatyka-Pomiary-Sterowanie as a stock to potentially avoid with its 15.4x 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.

Automatyka-Pomiary-Sterowanie has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, 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 Automatyka-Pomiary-Sterowanie

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

How Is Automatyka-Pomiary-Sterowanie's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Automatyka-Pomiary-Sterowanie's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. EPS has also lifted 7.6% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 7.9% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Automatyka-Pomiary-Sterowanie's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

Automatyka-Pomiary-Sterowanie's P/E is getting right up there since its shares have risen strongly. 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 Automatyka-Pomiary-Sterowanie currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Automatyka-Pomiary-Sterowanie that you need to be mindful of.

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.