Market Participants Recognise Elekta AB (publ)'s (STO:EKTA B) Earnings Pushing Shares 29% Higher

Elekta AB (publ) (STO:EKTA B) shareholders have had their patience rewarded with a 29% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.6% in the last twelve months.

Since its price has surged higher, Elekta may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 74.3x, since almost half of all companies in Sweden have P/E ratios under 22x and even P/E's lower than 14x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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While the market has experienced earnings growth lately, Elekta's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Elekta

Keen to find out how analysts think Elekta's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Elekta's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 71%. This means it has also seen a slide in earnings over the longer-term as EPS is down 65% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 87% per annum as estimated by the twelve analysts watching the company. That's shaping up to be materially higher than the 19% each year growth forecast for the broader market.

With this information, we can see why Elekta is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Shares in Elekta have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Elekta maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 4 warning signs for Elekta that you need to take into consideration.

If you're unsure about the strength of Elekta'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.