Karnov Group AB (publ)'s (STO:KAR) Share Price Not Quite Adding Up

When close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") below 23x, you may consider Karnov Group AB (publ) (STO:KAR) as a stock to avoid entirely with its 45.8x P/E ratio. 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 Karnov Group as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Karnov Group

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

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 285% gain to the company's bottom line. The latest three year period has also seen an excellent 591% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 5.8% each year during the coming three years according to the dual analysts following the company. That's shaping up to be materially lower than the 16% per year growth forecast for the broader market.

With this information, we find it concerning that Karnov Group is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Karnov Group's P/E?

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.

Our examination of Karnov Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

If you're unsure about the strength of Karnov Group'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. 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.
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