What You Can Learn From Wirtualna Polska Holding S.A.'s (WSE:WPL) P/E

Wirtualna Polska Holding S.A.'s (WSE:WPL) price-to-earnings (or "P/E") ratio of 15.2x might make it look like a sell right now compared to the market in Poland, where around half of the companies have P/E ratios below 10x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's inferior to most other companies of late, Wirtualna Polska Holding has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

Wirtualna Polska Holding's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 7.8% drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 19% per annum during the coming three years according to the six analysts following the company. With the market only predicted to deliver 6.5% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Wirtualna Polska Holding is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Wirtualna Polska Holding's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Wirtualna Polska Holding you should know about.

You might be able to find a better investment than Wirtualna Polska Holding. 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.