Why Investors Shouldn't Be Surprised By Verkkokauppa.com Oyj's (HEL:VERK) 31% Share Price Surge

Verkkokauppa.com Oyj (HEL:VERK) shares have continued their recent momentum with a 31% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 75% in the last year.

Since its price has surged higher, Verkkokauppa.com Oyj may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 67.7x, since almost half of all companies in Finland have P/E ratios under 20x and even P/E's lower than 13x 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 so lofty.

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With its earnings growth in positive territory compared to the declining earnings of most other companies, Verkkokauppa.com Oyj has been doing quite well of late. 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 Verkkokauppa.com Oyj

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Is There Enough Growth For Verkkokauppa.com Oyj?

In order to justify its P/E ratio, Verkkokauppa.com Oyj would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 44% last year. Still, incredibly EPS has fallen 81% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 73% each year over the next three years. That's shaping up to be materially higher than the 15% each year growth forecast for the broader market.

In light of this, it's understandable that Verkkokauppa.com Oyj's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

The strong share price surge has got Verkkokauppa.com Oyj's P/E rushing to great heights as well. 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 Verkkokauppa.com 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Verkkokauppa.com Oyj that you should be aware of.

Of course, you might also be able to find a better stock than Verkkokauppa.com Oyj. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.