Why Investors Shouldn't Be Surprised By Trans Polonia S.A.'s (WSE:TRN) 27% Share Price Surge

Despite an already strong run, Trans Polonia S.A. (WSE:TRN) shares have been powering on, with a gain of 27% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 7.3% isn't as impressive.

Following the firm bounce in price, given around half the companies in Poland have price-to-earnings ratios (or "P/E's") below 13x, you may consider Trans Polonia as a stock to potentially avoid with its 17.8x P/E ratio. 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.

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Earnings have risen firmly for Trans Polonia recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Trans Polonia

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Trans Polonia will help you shine a light on its historical performance.

How Is Trans Polonia's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Trans Polonia's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 22%. The latest three year period has also seen an excellent 117% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 18% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why Trans Polonia is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

Trans Polonia shares have received a push in the right direction, but its P/E is elevated too. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Trans Polonia revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for Trans Polonia you should be aware of.

If you're unsure about the strength of Trans Polonia'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.