Ecnology Group S.A. (WSE:ECN) May Have Run Too Fast Too Soon With Recent 26% Price Plummet

The Ecnology Group S.A. (WSE:ECN) share price has fared very poorly over the last month, falling by a substantial 26%. Nonetheless, the last 30 days have barely left a scratch on the stock's annual performance, which is up a whopping 375%.

Even after such a large drop in price, given close to half the companies in Poland have price-to-earnings ratios (or "P/E's") below 12x, you may still consider Ecnology Group as a stock to avoid entirely with its 59.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Ecnology Group certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Ecnology Group

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Ecnology Group will help you shine a light on its historical performance.

How Is Ecnology Group's Growth Trending?

Ecnology Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 45%. The latest three year period has also seen an excellent 56% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

It's interesting to note that the rest of the market is similarly expected to grow by 17% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Ecnology Group is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.

The Final Word

Ecnology Group's shares may have retreated, but its P/E is still flying high. 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 Ecnology Group currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. When we see average earnings with market-like 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 risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Ecnology Group is showing 4 warning signs in our investment analysis, and 2 of those make us uncomfortable.

You might be able to find a better investment than Ecnology Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com