NCAB Group AB (publ)'s (STO:NCAB) Shares Climb 26% But Its Business Is Yet to Catch Up

NCAB Group AB (publ) (STO:NCAB) shares have had a really impressive month, gaining 26% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.6% in the last twelve months.

Following the firm bounce in price, NCAB Group may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 39.5x, since almost half of all companies in Sweden have P/E ratios under 22x and even P/E's lower than 14x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

NCAB Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for NCAB Group

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

Is There Enough Growth For NCAB Group?

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

Retrospectively, the last year delivered a frustrating 23% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 188% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 12% per year during the coming three years according to the four analysts following the company. That's shaping up to be materially lower than the 20% per annum growth forecast for the broader market.

In light of this, it's alarming that NCAB Group's P/E sits above the majority of other companies. 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.

What We Can Learn From NCAB Group's P/E?

Shares in NCAB Group have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that NCAB Group 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for NCAB Group with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of NCAB Group'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.