EQL Pharma AB (publ)'s (STO:EQL) P/E Is Still On The Mark Following 37% Share Price Bounce

Despite an already strong run, EQL Pharma AB (publ) (STO:EQL) shares have been powering on, with a gain of 37% in the last thirty days. The annual gain comes to 140% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, EQL Pharma may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 77.8x, since almost half of all companies in Sweden have P/E ratios under 23x and even P/E's lower than 15x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for EQL Pharma as its earnings have been rising faster 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.

Check out our latest analysis for EQL Pharma

If you'd like to see what analysts are forecasting going forward, you should check out our free report on EQL Pharma.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 725% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 60% per year as estimated by the dual analysts watching the company. That's shaping up to be materially higher than the 22% each year growth forecast for the broader market.

With this information, we can see why EQL Pharma 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.

The Bottom Line On EQL Pharma's P/E

EQL Pharma's P/E is flying high just like its stock has during the last month. 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 EQL Pharma maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - EQL Pharma has 2 warning signs we think you should be aware of.

You might be able to find a better investment than EQL Pharma. 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.