Earnings Not Telling The Story For Tele2 AB (publ) (STO:TEL2 B) After Shares Rise 35%

Tele2 AB (publ) (STO:TEL2 B) shareholders have had their patience rewarded with a 35% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 72% in the last year.

After such a large jump in price, Tele2 may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 31.9x, since almost half of all companies in Sweden have P/E ratios under 23x and even P/E's lower than 15x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been advantageous for Tele2 as its earnings have been rising faster than most other companies. 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.

See our latest analysis for Tele2

Keen to find out how analysts think Tele2's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Tele2's Growth Trending?

Tele2's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 11% last year. Still, lamentably EPS has fallen 22% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 9.9% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 18% per year growth forecast for the broader market.

With this information, we find it concerning that Tele2 is trading at a P/E higher than the market. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Tele2's P/E?

Tele2's P/E is getting right up there since its shares have risen strongly. 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 Tele2 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Tele2 that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.