Harvia Oyj's (HEL:HARVIA) Share Price Could Signal Some Risk

When close to half the companies in Finland have price-to-earnings ratios (or "P/E's") below 18x, you may consider Harvia Oyj (HEL:HARVIA) as a stock to avoid entirely with its 32.5x 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.

Recent times have been pleasing for Harvia Oyj as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Harvia Oyj

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Harvia Oyj.

Does Growth Match The High P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 7.9% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 15% per annum as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 16% each year, which is not materially different.

In light of this, it's curious that Harvia Oyj's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

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 Harvia Oyj currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Harvia Oyj with six simple checks on some of these key factors.

If you're unsure about the strength of Harvia Oyj's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.