After Leaping 28% CellaVision AB (publ) (STO:CEVI) Shares Are Not Flying Under The Radar

Despite an already strong run, CellaVision AB (publ) (STO:CEVI) shares have been powering on, with a gain of 28% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 22% is also fairly reasonable.

After such a large jump in price, given close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") below 22x, you may consider CellaVision as a stock to avoid entirely with its 48.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

CellaVision certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 10% last year. Pleasingly, EPS has also lifted 46% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 27% per annum over the next three years. With the market only predicted to deliver 18% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why CellaVision is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From CellaVision's P/E?

CellaVision's P/E is flying high just like its stock has during the last month. 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.

As we suspected, our examination of CellaVision's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

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

If you're unsure about the strength of CellaVision's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.