Asseco Poland S.A.'s (WSE:ACP) Shares Climb 25% But Its Business Is Yet to Catch Up

Despite an already strong run, Asseco Poland S.A. (WSE:ACP) shares have been powering on, with a gain of 25% in the last thirty days. The last month tops off a massive increase of 107% in the last year.

After such a large jump in price, Asseco Poland may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 22.2x, since almost half of all companies in Poland have P/E ratios under 13x and even P/E's lower than 8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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With its earnings growth in positive territory compared to the declining earnings of most other companies, Asseco Poland has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Keen to find out how analysts think Asseco Poland's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Asseco Poland?

The only time you'd be truly comfortable seeing a P/E as steep as Asseco Poland's 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 25%. Pleasingly, EPS has also lifted 35% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 5.7% as estimated by the four analysts watching the company. That's not great when the rest of the market is expected to grow by 12%.

In light of this, it's alarming that Asseco Poland's P/E sits above the majority of other companies. 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 Bottom Line On Asseco Poland's P/E

Asseco Poland's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Asseco Poland's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. 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.

The company's balance sheet is another key area for risk analysis. 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 you're unsure about the strength of Asseco Poland's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.