HomeMaid AB (publ) (NGM:HOME B) Surges 30% Yet Its Low P/E Is No Reason For Excitement

HomeMaid AB (publ) (NGM:HOME B) shareholders have had their patience rewarded with a 30% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 72%.

Although its price has surged higher, HomeMaid's price-to-earnings (or "P/E") ratio of 18.7x might still make it look like a buy right now compared to the market in Sweden, where around half of the companies have P/E ratios above 23x and even P/E's above 40x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

HomeMaid certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for HomeMaid

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

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

Retrospectively, the last year delivered an exceptional 87% gain to the company's bottom line. Pleasingly, EPS has also lifted 60% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 29% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that HomeMaid's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

Despite HomeMaid's shares building up a head of steam, its P/E still lags most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that HomeMaid maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for HomeMaid that you should be aware of.

If these risks are making you reconsider your opinion on HomeMaid, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.