Jastrzebska Spólka Weglowa S.A.'s (WSE:JSW) Shares Lagging The Market But So Is The Business

Jastrzebska Spólka Weglowa S.A.'s (WSE:JSW) price-to-earnings (or "P/E") ratio of 2.2x might 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 27x 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.

Jastrzebska Spólka Weglowa could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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What Are Growth Metrics Telling Us About The Low P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 72%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 24% over the next year. That's not great when the rest of the market is expected to grow by 7.5%.

With this information, we are not surprised that Jastrzebska Spólka Weglowa is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Jastrzebska Spólka Weglowa maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Jastrzebska Spólka Weglowa (1 is concerning) you should be aware of.

If these risks are making you reconsider your opinion on Jastrzebska Spólka Weglowa, 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.