RaySearch Laboratories AB (publ)'s (STO:RAY B) 43% Price Boost Is Out Of Tune With Earnings

RaySearch Laboratories AB (publ) (STO:RAY B) shareholders would be excited to see that the share price has had a great month, posting a 43% gain and recovering from prior weakness. The last month tops off a massive increase of 133% in the last year.

Since its price has surged higher, RaySearch Laboratories' price-to-earnings (or "P/E") ratio of 50.5x might make it look like a strong sell right now compared to the market in Sweden, where around half of the companies have P/E ratios below 22x and even P/E's below 14x are quite common. 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.

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Recent times have been advantageous for RaySearch Laboratories 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for RaySearch Laboratories

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

Is There Enough Growth For RaySearch Laboratories?

There's an inherent assumption that a company should far outperform the market for P/E ratios like RaySearch Laboratories' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 125% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 22% per annum over the next three years. That's shaping up to be similar to the 20% per year growth forecast for the broader market.

With this information, we find it interesting that RaySearch Laboratories is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On RaySearch Laboratories' P/E

RaySearch Laboratories' P/E is flying high just like its stock has during the last month. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that RaySearch Laboratories currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with RaySearch Laboratories.

Of course, you might also be able to find a better stock than RaySearch Laboratories. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.