How Does Talenom Oyj's (HEL:TNOM) P/E Compare To Its Industry, After Its Big Share Price Gain?

It's really great to see that even after a strong run, Talenom Oyj (HEL:TNOM) shares have been powering on, with a gain of 401% in the last thirty days. Zooming out, the stock's 829% gain in the last year is certainly splendiferous.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Talenom Oyj

How Does Talenom Oyj's P/E Ratio Compare To Its Peers?

Talenom Oyj's P/E is 34.94. The image below shows that Talenom Oyj has a P/E ratio that is roughly in line with the professional services industry average (36.2).

Talenom Oyj's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Talenom Oyj actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

It's great to see that Talenom Oyj grew EPS by 19% in the last year. And earnings per share have improved by 37% annually, over the last three years. This could arguably justify a relatively high P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

So What Does Talenom Oyj's Balance Sheet Tell Us?

Talenom Oyj has net debt worth just 7.5% of its market capitalization. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.

The Verdict On Talenom Oyj's P/E Ratio

Talenom Oyj has a P/E of 34.9. That's higher than the average in its market, which is 20.6. The company is not overly constrained by its modest debt levels, and its recent EPS growth very solid. So on this analysis it seems reasonable that its P/E ratio is above average. What is very clear is that the market has become significantly more optimistic about Talenom Oyj over the last month, with the P/E ratio rising from 7.0 back then to 34.9 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

Of course you might be able to find a better stock than Talenom Oyj. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.