Develia S.A.'s (WSE:DVL) Share Price Boosted 25% But Its Business Prospects Need A Lift Too

Despite an already strong run, Develia S.A. (WSE:DVL) shares have been powering on, with a gain of 25% in the last thirty days. Looking further back, the 17% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, Develia may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.4x, since almost half of all companies in Poland have P/E ratios greater than 14x and even P/E's higher than 29x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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With its earnings growth in positive territory compared to the declining earnings of most other companies, Develia has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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.

See our latest analysis for Develia

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

Develia's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 36%. Pleasingly, EPS has also lifted 142% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 1.3% per annum over the next three years. Meanwhile, the broader market is forecast to expand by 9.4% each year, which paints a poor picture.

In light of this, it's understandable that Develia's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Develia's P/E?

Despite Develia's shares building up a head of steam, its P/E still lags most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Develia maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 2 warning signs for Develia you should be aware of, and 1 of them is concerning.

Of course, you might also be able to find a better stock than Develia. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.