The price of Beijer Ref AB (publ) (STO:BEIJ B) does not match the profit

When almost half of the companies in Sweden have a price-to-earnings (or “P/E”) ratio below 22, you might think about it Beijer Ref AB (publ) (STO:BEIJ B) is a stock to avoid due to its P/E ratio of 34.4. However, it is not advisable to simply take the P/E ratio at face value, as there may be an explanation as to why it is so high.

Beijer Ref has certainly done a good job recently, as its earnings growth has been stronger than most other companies. The P/E ratio is likely high as investors expect this strong earnings trend to continue. If not, existing shareholders may be a little nervous about the sustainability of the share price.

Check out our latest analysis for Beijer Ref

Want to find out how analysts think Beijer Ref’s future compares to the industry? In this case ours free The report is a good start.

What do growth metrics tell us about the high P/E ratio?

A P/E ratio as high as Beijer Ref’s can only be truly reassuring if the company’s growth is on track to significantly outperform the market.

If we first look back, we see that the company grew earnings per share by an impressive 29% last year. Strong recent performance has also seen the company grow its earnings per share by a total of 109% over the last three years. Therefore, it’s fair to say that the company’s earnings growth has been excellent recently.

Looking ahead, estimates from the company’s seven analysts suggest earnings are expected to rise 5.6% next year. However, growth of 32% is forecast for the rest of the market, which is much more attractive.

Based on this information, we find it concerning that Beijer Ref is trading at a P/E ratio that is higher than the market. Apparently, many of the company’s investors are much more optimistic than analysts suggest and are unwilling to offload their shares at any price. Only the bravest assume these prices are sustainable, as this level of earnings growth is likely to ultimately weigh heavily on the share price.

The key takeaway

While the price-to-earnings ratio shouldn’t be the deciding factor in whether or not you buy a stock, it is still a useful barometer of earnings expectations.

Our review of Beijer Ref’s analyst forecasts found that the weakening earnings outlook isn’t impacting the company’s high P/E ratio nearly as much as we would have expected. At the moment, we are becoming increasingly uneasy about the high P/E ratio, as forecast future earnings are unlikely to support this positive sentiment for long. Unless these conditions improve significantly, it will be very difficult to accept these prices as reasonable.

A company’s balance sheet can pose many potential risks. Take a look at ours free Financial statement analysis for Beijer Ref with six simple reviews of some of these key factors.

If yes uncertain about the strength of Beijer Ref’s businessExplore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Do you have feedback on this article? Worried about the content? Get in touch directly with us. Alternatively, you can also send an email to editor-team (at) simplywallst.com.

This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.