What Purefun Group AB (publ)'s (STO:PURE) 27% Share Price Gain Is Not Telling You

Purefun Group AB (publ) (STO:PURE) shareholders have had their patience rewarded with a 27% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 5.3% isn't as impressive.

Since its price has surged higher, Purefun Group's price-to-earnings (or "P/E") ratio of 72.1x might 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 23x and even P/E's below 14x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For instance, Purefun Group's receding earnings in recent times would have to be some food for thought. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Purefun Group

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 Purefun Group's earnings, revenue and cash flow.

Does Growth Match The High P/E?

Purefun Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 85% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 31% shows it's an unpleasant look.

With this information, we find it concerning that Purefun Group is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The strong share price surge has got Purefun Group's P/E rushing to great heights as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Purefun Group revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Purefun Group is showing 3 warning signs in our investment analysis, and 1 of those is potentially serious.

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.