Some MedCap AB (publ) (STO:MCAP) Shareholders Look For Exit As Shares Take 34% Pounding

MedCap AB (publ) (STO:MCAP) shareholders that were waiting for something to happen have been dealt a blow with a 34% share price drop in the last month. Indeed, the recent drop has reduced its annual gain to a relatively sedate 4.8% over the last twelve months.

Even after such a large drop in price, given around half the companies in Sweden have price-to-earnings ratios (or "P/E's") below 23x, you may still consider MedCap as a stock to potentially avoid with its 28.8x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, MedCap has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for MedCap

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

Is There Enough Growth For MedCap?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. The latest three year period has also seen an excellent 115% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 17% per year over the next three years. With the market predicted to deliver 21% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that MedCap is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

MedCap's P/E hasn't come down all the way after its stock plunged. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that MedCap currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very 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 MedCap, and understanding should be part of your investment process.

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