Net Insight AB (publ)'s (STO:NETI B) 25% Share Price Surge Not Quite Adding Up

Net Insight AB (publ) (STO:NETI B) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 17% over that time.

Since its price has surged higher, Net Insight may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 33.7x, since almost half of all companies in Sweden have P/E ratios under 19x and even P/E's lower than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Earnings have risen at a steady rate over the last year for Net Insight, which is generally not a bad outcome. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Net Insight

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 Net Insight's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as steep as Net Insight's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 5.4% gain to the company's bottom line. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Net Insight is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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

Shares in Net Insight 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.

Our examination of Net Insight revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Net Insight with six simple checks.

If these risks are making you reconsider your opinion on Net Insight, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.