There's Reason For Concern Over Vivid Games S.A.'s (WSE:VVD) Price

With a price-to-earnings (or "P/E") ratio of 23.9x Vivid Games S.A. (WSE:VVD) may be sending very bearish signals at the moment, given that almost half of all companies in Poland have P/E ratios under 15x and even P/E's lower than 8x 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.

Vivid Games certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Vivid Games

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 Vivid Games' earnings, revenue and cash flow.

Is There Enough Growth For Vivid Games?

The only time you'd be truly comfortable seeing a P/E as steep as Vivid Games' is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 329%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 15% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Vivid Games' 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Vivid Games' P/E

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 Vivid Games 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Vivid Games that you need to be mindful of.

If these risks are making you reconsider your opinion on Vivid Games, explore our interactive list of high quality stocks to get an idea of what else is out there.

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