After Leaping 26% AddLife AB (publ) (STO:ALIF B) Shares Are Not Flying Under The Radar

The AddLife AB (publ) (STO:ALIF B) share price has done very well over the last month, posting an excellent gain of 26%. Looking back a bit further, it's encouraging to see the stock is up 85% in the last year.

After such a large jump in price, given close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") below 21x, you may consider AddLife as a stock to avoid entirely with its 74.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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AddLife certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for AddLife

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

How Is AddLife's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 296%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 57% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 29% each year over the next three years. That's shaping up to be materially higher than the 20% each year growth forecast for the broader market.

With this information, we can see why AddLife 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 AddLife's P/E?

The strong share price surge has got AddLife's P/E rushing to great heights as well. 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 AddLife maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for AddLife you should know about.

If you're unsure about the strength of AddLife'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.