HomeMaid AB (publ)'s (NGM:HOME B) 28% Share Price Surge Not Quite Adding Up

Despite an already strong run, HomeMaid AB (publ) (NGM:HOME B) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 222% in the last year.

Since its price has surged higher, given close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") below 22x, you may consider HomeMaid as a stock to potentially avoid with its 27.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, HomeMaid has been doing very well. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for HomeMaid

Although there are no analyst estimates available for HomeMaid, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, HomeMaid would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 91% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 93% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 22% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that HomeMaid's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

HomeMaid's P/E is getting right up there since its shares have risen strongly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that HomeMaid currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 5 warning signs for HomeMaid (1 can't be ignored) you should be aware of.

Of course, you might also be able to find a better stock than HomeMaid. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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.

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