After Leaping 26% Sensys Gatso Group AB (publ) (STO:SENS) Shares Are Not Flying Under The Radar

Despite an already strong run, Sensys Gatso Group AB (publ) (STO:SENS) shares have been powering on, with a gain of 26% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 2.5% isn't as attractive.

Since its price has surged higher, Sensys Gatso Group may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 22.7x, since almost half of all companies in Sweden have P/E ratios under 17x and even P/E's lower than 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Sensys Gatso Group has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Sensys Gatso Group

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

In order to justify its P/E ratio, Sensys Gatso Group would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 302% last year. Pleasingly, EPS has also lifted 2,857% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 27% per year during the coming three years according to the twin analysts following the company. With the market only predicted to deliver 17% per year, the company is positioned for a stronger earnings result.

With this information, we can see why Sensys Gatso Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

The large bounce in Sensys Gatso Group's shares has lifted the company's P/E to a fairly high level. 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.

As we suspected, our examination of Sensys Gatso Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for Sensys Gatso Group that we have uncovered.

If you're unsure about the strength of Sensys Gatso 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.