Odlewnie Polskie S.A.'s (WSE:ODL) Popularity With Investors Is Under Threat From Overpricing
It's not a stretch to say that Odlewnie Polskie S.A.'s (WSE:ODL) price-to-earnings (or "P/E") ratio of 13x right now seems quite "middle-of-the-road" compared to the market in Poland, where the median P/E ratio is around 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
The earnings growth achieved at Odlewnie Polskie over the last year would be more than acceptable for most companies. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.
Check out our latest analysis for Odlewnie Polskie
Does Growth Match The P/E?
In order to justify its P/E ratio, Odlewnie Polskie would need to produce growth that's similar to the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 40% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 18% shows it's an unpleasant look.
In light of this, it's somewhat alarming that Odlewnie Polskie's P/E sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
What We Can Learn From Odlewnie Polskie's P/E?
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.
We've established that Odlewnie Polskie currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
You should always think about risks. Case in point, we've spotted 3 warning signs for Odlewnie Polskie you should be aware of, and 1 of them is concerning.
Of course, you might also be able to find a better stock than Odlewnie Polskie. 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.