Neste Oyj's (HEL:NESTE) 25% Cheaper Price Remains In Tune With Earnings

Neste Oyj (HEL:NESTE) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 61% share price decline.

In spite of the heavy fall in price, given around half the companies in Finland have price-to-earnings ratios (or "P/E's") below 18x, you may still consider Neste Oyj as a stock to potentially avoid with its 22.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Neste Oyj has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Neste Oyj

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

Does Growth Match The High P/E?

Neste Oyj's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 72%. As a result, earnings from three years ago have also fallen 67% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 51% per year over the next three years. That's shaping up to be materially higher than the 13% per year growth forecast for the broader market.

In light of this, it's understandable that Neste Oyj's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Neste Oyj's P/E

Despite the recent share price weakness, Neste Oyj's P/E remains higher than most other companies. 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.

As we suspected, our examination of Neste Oyj's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - Neste Oyj has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If these risks are making you reconsider your opinion on Neste Oyj, explore our interactive list of high quality stocks to get an idea of what else is out there.

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

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.