To the annoyance of some shareholders, Plejd AB (publ) (NGM:PLEJD) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Longer-term shareholders would now have taken a real hit with the stock declining 2.8% in the last year.
In spite of the heavy fall in price, Plejd's price-to-earnings (or "P/E") ratio of 70.7x might still make it look like a strong sell right now compared to the market in Sweden, where around half of the companies have P/E ratios below 21x and even P/E's below 11x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times have been quite advantageous for Plejd as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is Plejd's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Plejd's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 131% last year. Pleasingly, EPS has also lifted 13,412% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Comparing that to the market, which is only predicted to deliver 20% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
With this information, we can see why Plejd is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.
The Final Word
A significant share price dive has done very little to deflate Plejd's very lofty P/E. 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.
As we suspected, our examination of Plejd revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.
You need to take note of risks, for example - Plejd has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.
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.