With a price-to-earnings (or "P/E") ratio of 31.4x Polman S.A. (WSE:PLM) may be sending very bearish signals at the moment, given that almost half of all companies in Poland have P/E ratios under 13x 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.
For example, consider that Polman's financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Is There Enough Growth For Polman?
The only time you'd be truly comfortable seeing a P/E as steep as Polman's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 9.6% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 289% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
In contrast to the company, the rest of the market is expected to decline by 5.6% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.
In light of this, it's understandable that Polman's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse. Nonetheless, with most other businesses facing an uphill battle, staying on its current earnings path is no certainty.
The Key Takeaway
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.
As we suspected, our examination of Polman revealed its growing earnings over the medium-term are contributing to its high P/E, given the market is set to shrink. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. We still remain cautious about the company's ability to stay its recent course and swim against the current of the broader market turmoil. Although, if the company's relative performance doesn't change it will continue to provide strong support to the share price.
Before you settle on your opinion, we've discovered 2 warning signs for Polman that you should be aware of.
If these risks are making you reconsider your opinion on Polman, explore our interactive list of high quality stocks to get an idea of what else is out there.
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This article by Simply Wall St is general in nature. 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.
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