HomeMaid AB (publ)'s (NGM:HOME B) Shares Climb 25% But Its Business Is Yet to Catch Up

HomeMaid AB (publ) (NGM:HOME B) shares have continued their recent momentum with a 25% gain in the last month alone. The last month tops off a massive increase of 101% in the last year.

Although its price has surged higher, there still wouldn't be many who think HomeMaid's price-to-earnings (or "P/E") ratio of 22.2x is worth a mention when the median P/E in Sweden is similar at about 22x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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With earnings growth that's exceedingly strong of late, HomeMaid has been doing very well. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. 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 not quite in favour.

See our latest analysis for HomeMaid

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Does Growth Match The P/E?

In order to justify its P/E ratio, HomeMaid 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 87%. The strong recent performance means it was also able to grow EPS by 60% in total over the last three years. 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 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that HomeMaid 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.

The Bottom Line On HomeMaid's P/E

HomeMaid's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 HomeMaid 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. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

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.