Asseco Poland S.A. (WSE:ACP) Stock Rockets 27% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Asseco Poland S.A. (WSE:ACP) shares have been powering on, with a gain of 27% in the last thirty days. The last 30 days bring the annual gain to a very sharp 68%.

Since its price has surged higher, Asseco Poland's price-to-earnings (or "P/E") ratio of 16.3x 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 11x 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.

Asseco Poland certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. 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?

In order to justify its P/E ratio, Asseco Poland would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 31%. As a result, it also grew EPS by 25% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 5.8% as estimated by the three analysts watching the company. Meanwhile, the broader market is forecast to expand by 14%, which paints a poor picture.

With this information, we find it concerning that Asseco Poland is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Final Word

The large bounce in Asseco Poland's shares has lifted the company's P/E to a fairly high level. 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 Asseco Poland currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Asseco Poland with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Asseco Poland, 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.