Freetrailer Group A/S' (NGM:FREETR) Shares Climb 26% But Its Business Is Yet to Catch Up

Freetrailer Group A/S (NGM:FREETR) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 127% in the last year.

Following the firm bounce in price, Freetrailer Group's price-to-earnings (or "P/E") ratio of 53.4x might make it look like a strong sell right now compared to the market in Sweden, where around half of the companies have P/E ratios below 23x and even P/E's below 14x are quite common. 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.

Recent times have been quite advantageous for Freetrailer Group as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Freetrailer Group

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 Freetrailer Group's earnings, revenue and cash flow.

How Is Freetrailer Group's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 113% last year. The latest three year period has also seen an excellent 97% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 29% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Freetrailer Group's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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.

The Final Word

The strong share price surge has got Freetrailer Group's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Freetrailer Group 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Freetrailer Group that you should be aware of.

You might be able to find a better investment than Freetrailer Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.