Market Participants Recognise EQL Pharma AB (publ)'s (STO:EQL) Earnings Pushing Shares 26% Higher

The EQL Pharma AB (publ) (STO:EQL) share price has done very well over the last month, posting an excellent gain of 26%. The annual gain comes to 161% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") below 23x, you may consider EQL Pharma as a stock to avoid entirely with its 74.9x 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 so lofty.

EQL Pharma could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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How Is EQL Pharma's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. Even so, admirably EPS has lifted 1,480% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 65% each year over the next three years. That's shaping up to be materially higher than the 18% per annum growth forecast for the broader market.

In light of this, it's understandable that EQL Pharma's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Shares in EQL Pharma have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of EQL Pharma'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. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for EQL Pharma you should be aware of.

If these risks are making you reconsider your opinion on EQL Pharma, 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.