Swedish Orphan Biovitrum AB (publ)'s (STO:SOBI) Price In Tune With Earnings

Swedish Orphan Biovitrum AB (publ)'s (STO:SOBI) price-to-earnings (or "P/E") ratio of 23.2x might make it look like a sell right now compared to the market in Sweden, where around half of the companies have P/E ratios below 20x and even P/E's below 13x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Swedish Orphan Biovitrum 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

How Is Swedish Orphan Biovitrum's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 52% last year. The latest three year period has also seen a 25% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 25% per annum 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 Swedish Orphan Biovitrum 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 Swedish Orphan Biovitrum's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Swedish Orphan Biovitrum's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Swedish Orphan Biovitrum with six simple checks on some of these key factors.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.