There's Reason For Concern Over Polenergia S.A.'s (WSE:PEP) Price

When close to half the companies in Poland have price-to-earnings ratios (or "P/E's") below 12x, you may consider Polenergia S.A. (WSE:PEP) as a stock to avoid entirely with its 20.4x 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 so lofty.

Polenergia certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Polenergia

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Polenergia.

Is There Enough Growth For Polenergia?

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

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 33% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.0% each year as estimated by the three analysts watching the company. That's not great when the rest of the market is expected to grow by 9.2% per year.

In light of this, it's alarming that Polenergia'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. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

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

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Polenergia currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. 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.

It is also worth noting that we have found 1 warning sign for Polenergia that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.