Earnings Not Telling The Story For Nelly Group AB (publ) (STO:NELLY) After Shares Rise 25%

Despite an already strong run, Nelly Group AB (publ) (STO:NELLY) shares have been powering on, with a gain of 25% in the last thirty days. The last 30 days were the cherry on top of the stock's 304% gain in the last year, which is nothing short of spectacular.

In spite of the firm bounce in price, it's still not a stretch to say that Nelly Group's price-to-earnings (or "P/E") ratio of 22.7x right now seems quite "middle-of-the-road" compared to the market in Sweden, where the median P/E ratio is around 22x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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With earnings growth that's exceedingly strong of late, Nelly Group has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Nelly Group

Although there are no analyst estimates available for Nelly Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Nelly Group's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 119%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 30% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's curious that Nelly Group's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Nelly Group appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Nelly Group revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Nelly Group has 1 warning sign we think 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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