Surgical Science Sweden AB (publ) (STO: SUS) shares have had a terrible month and lost 33% after a relatively good period before. In fact, the recent decline has reduced its annual profit to a relatively quiet 2.5% over the past twelve months.

Despite the sharp fall in prices, Surgical Science Sweden’s price-to-profit (or “P / E”) ratio of 68.9x can still make it look like strong sales right now compared to the market in Sweden, where about half of the companies have P / E ratios below 17x and also P / E below 9x are quite common. But P / E can be quite high for a reason and it requires further investigation to determine if it is justified.

Surgical Science Sweden has really done a good job lately because it has increased revenue more than most other companies. It seems that many expect the strong earnings trend to continue, which has raised P / E. If not, existing shareholders may be a little nervous about the share price’s profitability.

See our latest analysis for Surgical Science Sweden

If you want to see what analysts predict in the future, you should check out our free report on Surgical Science Sweden.

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

The only time you would really feel comfortable seeing a P / E as steep as Surgical Science Swedens is when the company’s growth is about to surpass the market significantly.

If we examine the past year with profit growth, the company reported a fantastic increase of 335%. However, its long-term earnings have not been as strong with three-year earnings per share, which are relatively non-existent overall. Therefore, it is fair to say that profit growth has been inconsistent recently for the company.

Looking ahead now, profits per year are expected to rise by 35% per year over the next three years, according to twin analysts who follow the company. This will be significantly higher than the growth forecast of 17% per year for the broader market.

Against this background, it is understandable that Surgical Science Sweden’s P / E is above the majority of other companies. It seems that most investors expect this strong future growth and are willing to pay more for the stock.

The last word

Even after such a sharp fall in prices, Surgical Science still exceeds Sweden’s P / E significantly from the rest of the market. It is claimed that the price-to-profit ratio is a worse measure of value in some industries, but it can be a powerful business sentiment indicator.

As we suspected, our review of Surgical Science Sweden’s analysts’ forecasts showed that its superior earnings outlook contributes to its high P / E. Right now, shareholders are comfortable with P / E because they are pretty convinced that future profits are not threatened. It is difficult to see the share price fall sharply in the near future under these circumstances.

It is always necessary to consider the ever-present ghost of investment risk. We have identified 3 warning signs with Surgical Science Swedenand understanding these should be part of your investment process.

Of course, you may also be able to find a better stock than Surgical Science Sweden. So you might want to see this free collection of other companies that are at P / E below 20x and have increased earnings sharply.

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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst forecasts only using an impartial method and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the shares mentioned.