Bufab AB (publ)'s (STO:BUFAB) 28% Share Price Surge Not Quite Adding Up

Despite an already strong run, Bufab AB (publ) (STO:BUFAB) shares have been powering on, with a gain of 28% in the last thirty days. The last 30 days bring the annual gain to a very sharp 78%.

Since its price has surged higher, Bufab may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 23.2x, since almost half of all companies in Sweden have P/E ratios under 20x and even P/E's lower than 12x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Bufab 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.

See our latest analysis for Bufab

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Bufab.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a decent 7.6% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 140% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 2.9% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to expand by 23%, which is noticeably more attractive.

With this information, we find it concerning that Bufab is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

Bufab shares have received a push in the right direction, but its P/E is elevated too. 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 Bufab currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Bufab that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.