Nokia Oyj (HEL:NOKIA) Looks Just Right With A 38% Price Jump

Nokia Oyj (HEL:NOKIA) shares have continued their recent momentum with a 38% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 22% is also fairly reasonable.

After such a large jump in price, given close to half the companies in Finland have price-to-earnings ratios (or "P/E's") below 20x, you may consider Nokia Oyj as a stock to avoid entirely with its 34.9x 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.

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With only a limited decrease in earnings compared to most other companies of late, Nokia Oyj has been doing relatively well. The P/E is probably high because investors think this comparatively better earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price, especially if earnings continue to dissolve.

Check out our latest analysis for Nokia Oyj

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

How Is Nokia Oyj's Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 2.5%. This means it has also seen a slide in earnings over the longer-term as EPS is down 49% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 26% per annum during the coming three years according to the analysts following the company. With the market only predicted to deliver 15% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Nokia Oyj is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Nokia Oyj's P/E

Nokia Oyj's P/E is flying high just like its stock has during the last month. 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 Nokia 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. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Nokia Oyj that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.