Instalco AB (publ)'s (STO:INSTAL) Price Is Right But Growth Is Lacking

With a price-to-earnings (or "P/E") ratio of 17.2x Instalco AB (publ) (STO:INSTAL) may be sending bullish signals at the moment, given that almost half of all companies in Sweden have P/E ratios greater than 22x and even P/E's higher than 40x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been advantageous for Instalco as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 out of favour.

View our latest analysis for Instalco

Keen to find out how analysts think Instalco's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Instalco's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Instalco's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 15% last year. EPS has also lifted 26% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 16% per year over the next three years. With the market predicted to deliver 19% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Instalco's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Instalco's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Instalco is showing 2 warning signs in our investment analysis, you should know about.

You might be able to find a better investment than Instalco. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.