Mips AB (publ)'s (STO:MIPS) P/E Is On The Mark

Mips AB (publ)'s (STO:MIPS) price-to-earnings (or "P/E") ratio of 65.3x 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 22x 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.

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With earnings growth that's superior to most other companies of late, Mips has been doing relatively well. 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 Mips

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mips.

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 Mips' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 33%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 42% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 66% during the coming year according to the four analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 29%, which is noticeably less attractive.

In light of this, it's understandable that Mips' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

As we suspected, our examination of Mips' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Mips that you should be aware of.

If these risks are making you reconsider your opinion on Mips, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.