Market Participants Recognise Smartoptics Group AS' (OB:SMOP) Earnings Pushing Shares 26% Higher

Smartoptics Group AS (OB:SMOP) shares have had a really impressive month, gaining 26% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.6% in the last twelve months.

Following the firm bounce in price, given close to half the companies in Norway have price-to-earnings ratios (or "P/E's") below 12x, you may consider Smartoptics Group as a stock to avoid entirely with its 54.9x P/E ratio. 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.

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Smartoptics Group 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Smartoptics Group

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How Is Smartoptics Group's Growth Trending?

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

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 15%. As a result, earnings from three years ago have also fallen 36% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 48% per annum during the coming three years according to the one analyst following the company. That's shaping up to be materially higher than the 20% per year growth forecast for the broader market.

With this information, we can see why Smartoptics Group is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Smartoptics Group's P/E is flying high just like its stock has during the last month. 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.

We've established that Smartoptics Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Smartoptics Group that you should be aware of.

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.