DGA Spólka Akcyjna's (WSE:DGA) 152% Share Price Surge Not Quite Adding Up

DGA Spólka Akcyjna (WSE:DGA) shares have had a really impressive month, gaining 152% after a shaky period beforehand. The last month tops off a massive increase of 143% in the last year.

Following the firm bounce in price, given close to half the companies in Poland have price-to-earnings ratios (or "P/E's") below 12x, you may consider DGA Spólka Akcyjna as a stock to avoid entirely with its 26.7x 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.

For example, consider that DGA Spólka Akcyjna's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for DGA Spólka Akcyjna

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

Is There Enough Growth For DGA Spólka Akcyjna?

The only time you'd be truly comfortable seeing a P/E as steep as DGA Spólka Akcyjna's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 60% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 10% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that DGA Spólka Akcyjna's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On DGA Spólka Akcyjna's P/E

Shares in DGA Spólka Akcyjna have built up some good momentum lately, which has really inflated its P/E. 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 DGA Spólka Akcyjna 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware DGA Spólka Akcyjna is showing 5 warning signs in our investment analysis, and 3 of those are a bit unpleasant.

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.