Unpleasant Surprises Could Be In Store For AAK AB (publ.)'s (STO:AAK) Shares
With a median price-to-earnings (or "P/E") ratio of close to 21x in Sweden, you could be forgiven for feeling indifferent about AAK AB (publ.)'s (STO:AAK) P/E ratio of 21.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With earnings growth that's superior to most other companies of late, AAK AB (publ.) has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
View our latest analysis for AAK AB (publ.)
What Are Growth Metrics Telling Us About The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like AAK AB (publ.)'s to be considered reasonable.
Retrospectively, the last year delivered an exceptional 66% gain to the company's bottom line. Pleasingly, EPS has also lifted 84% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 5.6% per annum over the next three years. With the market predicted to deliver 19% growth each year, the company is positioned for a weaker earnings result.
With this information, we find it interesting that AAK AB (publ.) is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
What We Can Learn From AAK AB (publ.)'s P/E?
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that AAK AB (publ.) currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for AAK AB (publ.) with six simple checks will allow you to discover any risks that could be an issue.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.