Votum S.A. (WSE:VOT) Soars 26% But It's A Story Of Risk Vs Reward

Votum S.A. (WSE:VOT) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 8.7% over the last year.

Although its price has surged higher, Votum's price-to-earnings (or "P/E") ratio of 4.4x might still make it look like a strong buy right now compared to the market in Poland, where around half of the companies have P/E ratios above 13x and even P/E's above 28x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

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As an illustration, earnings have deteriorated at Votum over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Votum

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 Votum's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Votum's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 14%. Still, the latest three year period has seen an excellent 1,021% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 17% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Votum's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Shares in Votum are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

Our examination of Votum revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

Before you take the next step, you should know about the 1 warning sign for Votum that we have uncovered.

If these risks are making you reconsider your opinion on Votum, 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. 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.