Why Investors Shouldn't Be Surprised By Paradox Interactive AB (publ)'s (STO:PDX) P/E

When close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") below 21x, you may consider Paradox Interactive AB (publ) (STO:PDX) as a stock to avoid entirely with its 35x 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.

Paradox Interactive hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

Check out our latest analysis for Paradox Interactive

Keen to find out how analysts think Paradox Interactive's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 25%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 8.1% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 25% each year as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 19% per annum, which is noticeably less attractive.

With this information, we can see why Paradox Interactive 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.

What We Can Learn From Paradox Interactive's 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.

We've established that Paradox Interactive 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.

Before you settle on your opinion, we've discovered 2 warning signs for Paradox Interactive that you should be aware of.

If you're unsure about the strength of Paradox Interactive'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. 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.