Scandinavian Tobacco Group A/S' (CPH:STG) Shares Lagging The Market But So Is The Business

Scandinavian Tobacco Group A/S' (CPH:STG) price-to-earnings (or "P/E") ratio of 7.2x might make it look like a strong buy right now compared to the market in Denmark, where around half of the companies have P/E ratios above 15x and even P/E's above 30x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Scandinavian Tobacco Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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.

See our latest analysis for Scandinavian Tobacco Group

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

How Is Scandinavian Tobacco Group's Growth Trending?

In order to justify its P/E ratio, Scandinavian Tobacco Group would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 16%. Still, the latest three year period has seen an excellent 107% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 1.5% per year during the coming three years according to the three analysts following the company. Meanwhile, the rest of the market is forecast to expand by 16% per annum, which is noticeably more attractive.

With this information, we can see why Scandinavian Tobacco Group is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Scandinavian Tobacco Group'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 Scandinavian Tobacco Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Scandinavian Tobacco Group that you need to be mindful of.

If you're unsure about the strength of Scandinavian Tobacco Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.