After Leaping 29% Kongsberg Gruppen ASA (OB:KOG) Shares Are Not Flying Under The Radar

Kongsberg Gruppen ASA (OB:KOG) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last month tops off a massive increase of 135% in the last year.

Following the firm bounce in price, Kongsberg Gruppen's price-to-earnings (or "P/E") ratio of 53.5x might make it look like a strong sell right now compared to the market in Norway, where around half of the companies have P/E ratios below 11x and even P/E's below 6x are quite common. 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.

Kongsberg Gruppen certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Kongsberg Gruppen

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Is There Enough Growth For Kongsberg Gruppen?

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

Retrospectively, the last year delivered an exceptional 38% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 142% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 17% per annum during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 12% each year, which is noticeably less attractive.

In light of this, it's understandable that Kongsberg Gruppen'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

Kongsberg Gruppen's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Kongsberg Gruppen'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.

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

If you're unsure about the strength of Kongsberg Gruppen'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.