Envirologic AB (publ)'s (NGM:ENVI B) Shares Climb 58% But Its Business Is Yet to Catch Up

Envirologic AB (publ) (NGM:ENVI B) shares have had a really impressive month, gaining 58% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 26%.

Even after such a large jump in price, there still wouldn't be many who think Envirologic's price-to-earnings (or "P/E") ratio of 24.2x is worth a mention when the median P/E in Sweden is similar at about 24x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Earnings have risen firmly for Envirologic recently, which is pleasing to see. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

View our latest analysis for Envirologic

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Envirologic's earnings, revenue and cash flow.

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 26% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 28% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Envirologic's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Bottom Line On Envirologic's P/E

Envirologic appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Envirologic revealed its three-year earnings trends aren't impacting its P/E 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 moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Envirologic (1 is a bit concerning!) that you should be aware of before investing here.

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