MedCap AB (publ)'s (STO:MCAP) Shares Climb 27% But Its Business Is Yet to Catch Up

MedCap AB (publ) (STO:MCAP) shares have continued their recent momentum with a 27% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 5.9% over 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 23x, you may consider MedCap as a stock to avoid entirely with its 39.3x 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.

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For example, consider that MedCap's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for MedCap

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on MedCap's earnings, revenue and cash flow.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 1.1% decrease to the company's bottom line. Even so, admirably EPS has lifted 96% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

It's interesting to note that the rest of the market is similarly expected to grow by 27% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's curious that MedCap's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.

The Final Word

The strong share price surge has got MedCap'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.

Our examination of MedCap revealed its three-year earnings trends aren't impacting its high P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about this 1 warning sign we've spotted with MedCap.

You might be able to find a better investment than MedCap. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.