MPL Verbum S.A.'s (WSE:VER) 47% Share Price Surge Not Quite Adding Up

The MPL Verbum S.A. (WSE:VER) share price has done very well over the last month, posting an excellent gain of 47%. The last 30 days bring the annual gain to a very sharp 67%.

Following the firm bounce in price, MPL Verbum may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 25.4x, since almost half of all companies in Poland have P/E ratios under 11x and even P/E's lower than 7x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been quite advantageous for MPL Verbum as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for MPL Verbum

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 MPL Verbum's earnings, revenue and cash flow.

Does Growth Match The High P/E?

MPL Verbum's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 102% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 30% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 16% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that MPL Verbum's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On MPL Verbum's P/E

The strong share price surge has got MPL Verbum's P/E rushing to great heights as well. 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.

We've established that MPL Verbum currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - MPL Verbum has 2 warning signs we think you should be aware of.

You might be able to find a better investment than MPL Verbum. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.