There's Reason For Concern Over Envirologic AB (publ)'s (NGM:ENVI B) Massive 58% Price Jump

Envirologic AB (publ) (NGM:ENVI B) shareholders would be excited to see that the share price has had a great month, posting a 58% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 26%.

In spite of the firm bounce in price, it's still not a stretch to say that Envirologic's price-to-earnings (or "P/E") ratio of 24.2x right now seems quite "middle-of-the-road" compared to the market in Sweden, where the median P/E ratio is around 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.

See 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.

Is There Some Growth For Envirologic?

In order to justify its P/E ratio, Envirologic would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 26%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 28% shows it's noticeably less attractive on an annualised basis.

With this information, we find it interesting that Envirologic is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From 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.

We've established that Envirologic currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Envirologic (of which 1 is a bit unpleasant!) you should know about.

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.