Optimistic Investors Push Electromagnetic Geoservices ASA (OB:EMGS) Shares Up 39% But Growth Is Lacking

Electromagnetic Geoservices ASA (OB:EMGS) shares have had a really impressive month, gaining 39% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 59%.

After such a large jump in price, Electromagnetic Geoservices' price-to-earnings (or "P/E") ratio of 13.6x might make it look like a sell right now compared to the market in Norway, where around half of the companies have P/E ratios below 10x 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 elevated P/E.

For example, consider that Electromagnetic Geoservices' financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Electromagnetic Geoservices

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Electromagnetic Geoservices will help you shine a light on its historical performance.

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

The only time you'd be truly comfortable seeing a P/E as high as Electromagnetic Geoservices' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 56% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 32% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Electromagnetic Geoservices' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Electromagnetic Geoservices' P/E

Electromagnetic Geoservices shares have received a push in the right direction, but its P/E is elevated too. 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.

Our examination of Electromagnetic Geoservices revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 5 warning signs for Electromagnetic Geoservices (2 are concerning!) that you should be aware of before investing here.

You might be able to find a better investment than Electromagnetic Geoservices. 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.