Mennica Skarbowa S.A.'s (WSE:MNS) Shares Lagging The Market But So Is The Business

With a price-to-earnings (or "P/E") ratio of 10x Mennica Skarbowa S.A. (WSE:MNS) may be sending bullish signals at the moment, given that almost half of all companies in Poland have P/E ratios greater than 13x and even P/E's higher than 25x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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With earnings growth that's exceedingly strong of late, Mennica Skarbowa has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Mennica Skarbowa

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Mennica Skarbowa's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

Mennica Skarbowa's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 36% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 78% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 20% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Mennica Skarbowa's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Mennica Skarbowa revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Mennica Skarbowa has 4 warning signs (and 3 which are a bit unpleasant) we think you should know about.

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.