Earnings Not Telling The Story For e-Xim IT S.A. (WSE:EXM) After Shares Rise 97%

e-Xim IT S.A. (WSE:EXM) shareholders would be excited to see that the share price has had a great month, posting a 97% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.5% in the last twelve months.

Since its price has surged higher, e-Xim IT may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 38.4x, since almost half of all companies in Poland have P/E ratios under 10x and even P/E's lower than 5x 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.

For example, consider that e-Xim IT's financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, 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.

Check out our latest analysis for e-Xim IT

Although there are no analyst estimates available for e-Xim IT, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

There's an inherent assumption that a company should far outperform the market for P/E ratios like e-Xim IT's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 63%. The last three years don't look nice either as the company has shrunk EPS by 93% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 3.3% shows it's an unpleasant look.

With this information, we find it concerning that e-Xim IT is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On e-Xim IT's P/E

e-Xim IT'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.

We've established that e-Xim IT currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 4 warning signs for e-Xim IT (2 shouldn't be ignored!) that you need to be mindful of.

If these risks are making you reconsider your opinion on e-Xim IT, 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.