Unpleasant Surprises Could Be In Store For Söder Sportfiske AB's (STO:SODER) Shares

When close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") below 23x, you may consider Söder Sportfiske AB (STO:SODER) as a stock to avoid entirely with its 57.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Söder Sportfiske has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be 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.

See our latest analysis for Söder Sportfiske

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

How Is Söder Sportfiske's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. Still, incredibly EPS has fallen 68% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Söder Sportfiske 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.

What We Can Learn From Söder Sportfiske's P/E?

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.

We've established that Söder Sportfiske currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for Söder Sportfiske (1 is concerning!) that you should be aware of.

Of course, you might also be able to find a better stock than Söder Sportfiske. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com