There's Reason For Concern Over Investeringsselskabet Luxor A/S' (CPH:LUXOR B) Massive 26% Price Jump

The Investeringsselskabet Luxor A/S (CPH:LUXOR B) share price has done very well over the last month, posting an excellent gain of 26%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 18% in the last twelve months.

Since its price has surged higher, given close to half the companies in Denmark have price-to-earnings ratios (or "P/E's") below 13x, you may consider Investeringsselskabet Luxor as a stock to avoid entirely with its 23.5x 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.

For example, consider that Investeringsselskabet Luxor's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Investeringsselskabet Luxor

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

Is There Enough Growth For Investeringsselskabet Luxor?

The only time you'd be truly comfortable seeing a P/E as steep as Investeringsselskabet Luxor's is when the company's growth is on track to outshine 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 72%. As a result, earnings from three years ago have also fallen 15% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 13% shows it's an unpleasant look.

With this information, we find it concerning that Investeringsselskabet Luxor is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very 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 Investeringsselskabet Luxor's P/E?

Shares in Investeringsselskabet Luxor have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Investeringsselskabet Luxor revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Investeringsselskabet Luxor has 3 warning signs (and 2 which are significant) we think you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.