Tomra Systems ASA (OB:TOM) Looks Just Right With A 28% Price Jump

Tomra Systems ASA (OB:TOM) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 22% in the last twelve months.

After such a large jump in price, Tomra Systems' price-to-earnings (or "P/E") ratio of 56.2x 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Tomra Systems could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Tomra Systems

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

Tomra Systems' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 32%. The last three years don't look nice either as the company has shrunk EPS by 10% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 37% each year over the next three years. That's shaping up to be materially higher than the 19% each year growth forecast for the broader market.

In light of this, it's understandable that Tomra Systems' 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 Tomra Systems' P/E rushing to great heights as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Tomra Systems' 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.

Before you settle on your opinion, we've discovered 2 warning signs for Tomra Systems (1 shouldn't be ignored!) that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.