After Leaping 37% Sedivio S.A. (WSE:SED) Shares Are Not Flying Under The Radar

Sedivio S.A. (WSE:SED) shares have had a really impressive month, gaining 37% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 38%.

After such a large jump in price, Sedivio's price-to-earnings (or "P/E") ratio of 15.3x 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times have been quite advantageous for Sedivio as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Sedivio

Although there are no analyst estimates available for Sedivio, 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?

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

Retrospectively, the last year delivered an exceptional 80% gain to the company's bottom line. Pleasingly, EPS has also lifted 542% 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.

This is in contrast to the rest of the market, which is expected to grow by 7.8% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Sedivio's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

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

The large bounce in Sedivio'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 Sedivio maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Sedivio (of which 2 can't be ignored!) you should know about.

You might be able to find a better investment than Sedivio. 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.