Market Participants Recognise MAG Interactive AB (publ)'s (STO:MAGI) Earnings Pushing Shares 27% Higher

The MAG Interactive AB (publ) (STO:MAGI) share price has done very well over the last month, posting an excellent gain of 27%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 11% over that time.

Since its price has surged higher, MAG Interactive may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 59.3x, since almost half of all companies in Sweden have P/E ratios under 15x and even P/E's lower than 8x 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.

MAG Interactive certainly has been doing a good job lately as it's been growing earnings more 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.

Check out the opportunities and risks within the SE Entertainment industry.

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

Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 61%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 70% per year over the next three years. That's shaping up to be materially higher than the 15% each year growth forecast for the broader market.

With this information, we can see why MAG Interactive 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

The strong share price surge has got MAG Interactive's P/E rushing to great heights as well. 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.

As we suspected, our examination of MAG Interactive'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. It's hard to see the share price falling strongly in the near future under these circumstances.

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

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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.