There's Reason For Concern Over SmartCraft ASA's (OB:SMCRT) Massive 26% Price Jump

SmartCraft ASA (OB:SMCRT) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 15% over that time.

Since its price has surged higher, given close to half the companies in Norway have price-to-earnings ratios (or "P/E's") below 11x, you may consider SmartCraft as a stock to avoid entirely with its 42.5x 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.

SmartCraft certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Growth For SmartCraft?

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

Retrospectively, the last year delivered an exceptional 492% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 32% over the next year. That's shaping up to be similar to the 30% growth forecast for the broader market.

With this information, we find it interesting that SmartCraft is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On SmartCraft's P/E

SmartCraft'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.

We've established that SmartCraft currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with SmartCraft, and understanding should be part of your investment process.

If you're unsure about the strength of SmartCraft'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.