Earnings Not Telling The Story For ChemoMetec A/S (CPH:CHEMM) After Shares Rise 27%

ChemoMetec A/S (CPH:CHEMM) shareholders have had their patience rewarded with a 27% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 15% over that time.

Since its price has surged higher, given close to half the companies in Denmark have price-to-earnings ratios (or "P/E's") below 15x, you may consider ChemoMetec as a stock to avoid entirely with its 46.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

ChemoMetec could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for ChemoMetec

Keen to find out how analysts think ChemoMetec's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For ChemoMetec?

The only time you'd be truly comfortable seeing a P/E as steep as ChemoMetec's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's bottom line. Even so, admirably EPS has lifted 94% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 8.4% per year as estimated by the three analysts watching the company. With the market predicted to deliver 17% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's alarming that ChemoMetec'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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From ChemoMetec's P/E?

The strong share price surge has got ChemoMetec's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that ChemoMetec 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 1 warning sign for ChemoMetec that you need to take into consideration.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com