Genovis AB (publ.)'s (STO:GENO) Popularity With Investors Under Threat As Stock Sinks 27%

The Genovis AB (publ.) (STO:GENO) share price has fared very poorly over the last month, falling by a substantial 27%. The recent drop has obliterated the annual return, with the share price now down 6.8% over that longer period.

Although its price has dipped substantially, Genovis AB (publ.)'s price-to-earnings (or "P/E") ratio of 76.9x might still make it look like a strong sell right now compared to the market in Sweden, where around half of the companies have P/E ratios below 17x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been advantageous for Genovis AB (publ.) as its earnings have been rising faster 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 our latest analysis for Genovis AB (publ.)

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

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 Genovis AB (publ.)'s to be considered reasonable.

Retrospectively, the last year delivered an exceptional 299% gain to the company's bottom line. The latest three year period has also seen an excellent 2,533% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 20% each year during the coming three years according to the only analyst following the company. That's shaping up to be similar to the 18% per annum growth forecast for the broader market.

In light of this, it's curious that Genovis AB (publ.)'s P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Genovis AB (publ.)'s P/E?

Even after such a strong price drop, Genovis AB (publ.)'s P/E still exceeds the rest of the market significantly. 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 Genovis AB (publ.) currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Genovis AB (publ.), and understanding should be part of your investment process.

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.