What SP Group A/S' (CPH:SPG) 31% Share Price Gain Is Not Telling You

SP Group A/S (CPH:SPG) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 47%.

Following the firm bounce in price, SP Group's price-to-earnings (or "P/E") ratio of 17.3x might make it look like a sell right now compared to the market in Denmark, where around half of the companies have P/E ratios below 15x and even P/E's below 7x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

SP Group's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For SP Group?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 21% last year. As a result, it also grew EPS by 24% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 7.0% as estimated by the sole analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 19%, which is noticeably more attractive.

In light of this, it's alarming that SP Group's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

The large bounce in SP Group's shares has lifted the company's P/E to a fairly high level. 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.

We've established that SP Group currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for SP Group with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than SP Group. 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.