Improved Earnings Required Before ZE PAK SA (WSE:ZEP) Stock's 34% Jump Looks Justified

ZE PAK SA (WSE:ZEP) shares have had a really impressive month, gaining 34% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 10% in the last twelve months.

Even after such a large jump in price, ZE PAK's price-to-earnings (or "P/E") ratio of 2x might still make it look like a strong buy right now compared to the market in Poland, where around half of the companies have P/E ratios above 12x and even P/E's above 22x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been advantageous for ZE PAK as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for ZE PAK

Want the full picture on analyst estimates for the company? Then our free report on ZE PAK will help you uncover what's on the horizon.

Is There Any Growth For ZE PAK?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 174% last year. The strong recent performance means it was also able to grow EPS by 241% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 84% as estimated by the dual analysts watching the company. Meanwhile, the broader market is forecast to expand by 16%, which paints a poor picture.

In light of this, it's understandable that ZE PAK's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From ZE PAK's P/E?

ZE PAK's recent share price jump still sees its P/E sitting firmly flat on the ground. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of ZE PAK's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 3 warning signs for ZE PAK (of which 2 are a bit concerning!) you should know about.

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.