Unpleasant Surprises Could Be In Store For Springvest Oyj's (HEL:SPRING) Shares
Springvest Oyj's (HEL:SPRING) price-to-earnings (or "P/E") ratio of 37.2x might make it look like a strong sell right now compared to the market in Finland, where around half of the companies have P/E ratios below 19x and even P/E's below 14x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Recent times have been pleasing for Springvest Oyj as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, 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 Springvest Oyj
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Springvest Oyj's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 21%. The latest three year period has also seen an excellent 193% 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.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 0.3% per year as estimated by the lone analyst watching the company. That's not great when the rest of the market is expected to grow by 16% each year.
With this information, we find it concerning that Springvest Oyj is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.
The Bottom Line On Springvest Oyj's P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Springvest Oyj currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 3 warning signs for Springvest Oyj (1 is a bit concerning!) that you should be aware of.
Of course, you might also be able to find a better stock than Springvest Oyj. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.