Earnings Not Telling The Story For Przedsiebiorstwa Telekomunikacyjnego TELGAM S.A. (WSE:TLG)

When close to half the companies in Poland have price-to-earnings ratios (or "P/E's") below 11x, you may consider Przedsiebiorstwa Telekomunikacyjnego TELGAM S.A. (WSE:TLG) as a stock to avoid entirely with its 37.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For example, consider that Przedsiebiorstwa Telekomunikacyjnego TELGAM's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Przedsiebiorstwa Telekomunikacyjnego TELGAM

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Przedsiebiorstwa Telekomunikacyjnego TELGAM's 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 Przedsiebiorstwa Telekomunikacyjnego TELGAM's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 4.0%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 16% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Przedsiebiorstwa Telekomunikacyjnego TELGAM's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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.

What We Can Learn From Przedsiebiorstwa Telekomunikacyjnego TELGAM's P/E?

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 Przedsiebiorstwa Telekomunikacyjnego TELGAM currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, 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.

You should always think about risks. Case in point, we've spotted 4 warning signs for Przedsiebiorstwa Telekomunikacyjnego TELGAM you should be aware of, and 1 of them shouldn't be ignored.

Of course, you might also be able to find a better stock than Przedsiebiorstwa Telekomunikacyjnego TELGAM. 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.