Shareholders Should Be Pleased With AddLife AB (publ)'s (STO:ALIF B) Price

When close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") below 23x, you may consider AddLife AB (publ) (STO:ALIF B) as a stock to avoid entirely with its 60.9x 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.

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AddLife 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for AddLife

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

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as AddLife's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 186% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 45% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 25% per annum during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 18% each year growth forecast for the broader market.

In light of this, it's understandable that AddLife's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. 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 1 warning sign for AddLife that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.