Budimex SA's (WSE:BDX) Popularity With Investors Is Under Threat From Overpricing

With a price-to-earnings (or "P/E") ratio of 20.3x Budimex SA (WSE:BDX) may be sending very bearish signals at the moment, given that almost half of all companies in Poland have P/E ratios under 12x and even P/E's lower than 7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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With earnings growth that's superior to most other companies of late, Budimex has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Budimex

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

How Is Budimex's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Budimex's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 17% gain to the company's bottom line. Pleasingly, EPS has also lifted 65% 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 five analysts covering the company suggest earnings growth is heading into negative territory, declining 0.7% over the next year. Meanwhile, the broader market is forecast to expand by 9.0%, which paints a poor picture.

With this information, we find it concerning that Budimex is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Final Word

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 Budimex currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 1 warning sign for Budimex that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.