There's Reason For Concern Over Squirrel Media, S.A.'s (BME:SQRL) Massive 64% Price Jump

Squirrel Media, S.A. (BME:SQRL) shares have continued their recent momentum with a 64% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 36% in the last year.

Since its price has surged higher, Squirrel Media may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 26.4x, since almost half of all companies in Spain have P/E ratios under 19x and even P/E's lower than 11x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With earnings growth that's exceedingly strong of late, Squirrel Media has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Squirrel Media

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

How Is Squirrel Media's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 185%. Pleasingly, EPS has also lifted 36% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 11% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised earnings results.

In light of this, it's curious that Squirrel Media's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Squirrel Media shares have received a push in the right direction, but its P/E is elevated too. 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 Squirrel Media currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. When we see average earnings with market-like growth, 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 risk and potential investors in danger of paying an unnecessary premium.

You need to take note of risks, for example - Squirrel Media has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

You might be able to find a better investment than Squirrel Media. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.