Investors House Oyj's (HEL:INVEST) Share Price Boosted 33% But Its Business Prospects Need A Lift Too

Explore Investors House Oyj's Fair Values from the Community and select yours

Investors House Oyj (HEL:INVEST) shares have continued their recent momentum with a 33% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 42% in the last year.

Even after such a large jump in price, Investors House Oyj's price-to-earnings (or "P/E") ratio of 7.6x might still make it look like a strong buy right now compared to the market in Finland, where around half of the companies have P/E ratios above 21x and even P/E's above 31x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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With its earnings growth in positive territory compared to the declining earnings of most other companies, Investors House Oyj has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Investors House Oyj

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

What Are Growth Metrics Telling Us About The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 36%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 30% each year as estimated by the dual analysts watching the company. Meanwhile, the broader market is forecast to expand by 16% each year, which paints a poor picture.

In light of this, it's understandable that Investors House Oyj's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Investors House Oyj's P/E

Shares in Investors House Oyj are going to need a lot more upward momentum to get the company's P/E out of its slump. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Investors House Oyj maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Investors House Oyj has 6 warning signs (and 3 which are significant) we think you should know about.

You might be able to find a better investment than Investors House Oyj. 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.