Market Cool On Arlen S.A.'s (WSE:ARL) Earnings Pushing Shares 25% Lower

Arlen S.A. (WSE:ARL) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Even after such a large drop in price, there still wouldn't be many who think Arlen's price-to-earnings (or "P/E") ratio of 13.1x is worth a mention when the median P/E in Poland is similar at about 12x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Earnings have risen firmly for Arlen recently, which is pleasing to see. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

View our latest analysis for Arlen

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

How Is Arlen's Growth Trending?

In order to justify its P/E ratio, Arlen would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. The latest three year period has also seen an excellent 98% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 18% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Arlen is trading at a fairly similar P/E to the market. It may be that most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Arlen's P/E?

Following Arlen's share price tumble, its P/E is now hanging on to the median market P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Arlen revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Arlen with six simple checks will allow you to discover any risks that could be an issue.

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.