Market Still Lacking Some Conviction On Volvo Car AB (publ.) (STO:VOLCAR B)

When close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") above 24x, you may consider Volvo Car AB (publ.) (STO:VOLCAR B) as a highly attractive investment with its 5.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Volvo Car AB (publ.) certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Volvo Car AB (publ.)

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Volvo Car AB (publ.).

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Volvo Car AB (publ.)'s to be considered reasonable.

Retrospectively, the last year delivered an exceptional 52% gain to the company's bottom line. EPS has also lifted 18% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 31% per year over the next three years. That's shaping up to be materially higher than the 19% per year growth forecast for the broader market.

With this information, we find it odd that Volvo Car AB (publ.) is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Volvo Car AB (publ.)'s analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Volvo Car AB (publ.) with six simple checks on some of these key factors.

If you're unsure about the strength of Volvo Car AB (publ.)'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.