ZE PAK SA (WSE:ZEP) Held Back By Insufficient Growth Even After Shares Climb 38%

ZE PAK SA (WSE:ZEP) shareholders have had their patience rewarded with a 38% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 25%.

Even after such a large jump in price, given about half the companies in Poland have price-to-earnings ratios (or "P/E's") above 14x, you may still consider ZE PAK as a highly attractive investment with its 4.8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

We've discovered 3 warning signs about ZE PAK. View them for free.

For example, consider that ZE PAK's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for ZE PAK

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 ZE PAK's earnings, revenue and cash flow.

Is There Any Growth For ZE PAK?

The only time you'd be truly comfortable seeing a P/E as depressed as ZE PAK's is when the company's growth is on track to lag the market decidedly.

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 55%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 12% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that ZE PAK's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

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

Shares in ZE PAK are going to need a lot more upward momentum to get the company's P/E out of its slump. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that ZE PAK maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for ZE PAK you should be aware of, and 1 of them can't be ignored.

Of course, you might also be able to find a better stock than ZE PAK. 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.