Premium Snacks Nordic AB (publ)'s (STO:SNX) 26% Price Boost Is Out Of Tune With Earnings

Premium Snacks Nordic AB (publ) (STO:SNX) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 171% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in Sweden have price-to-earnings ratios (or "P/E's") below 23x, you may consider Premium Snacks Nordic as a stock to potentially avoid with its 29x P/E ratio. 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.

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With earnings growth that's exceedingly strong of late, Premium Snacks Nordic has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Premium Snacks Nordic

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Premium Snacks Nordic's earnings, revenue and cash flow.

Does Growth Match The High P/E?

Premium Snacks Nordic's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 149% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

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.

In light of this, it's alarming that Premium Snacks Nordic's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Premium Snacks Nordic's P/E

Premium Snacks Nordic shares have received a push in the right direction, but its P/E is elevated too. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Premium Snacks Nordic currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. 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.

You always need to take note of risks, for example - Premium Snacks Nordic has 3 warning signs we think you should be aware of.

You might be able to find a better investment than Premium Snacks Nordic. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.