Envirologic AB (publ)'s (NGM:ENVI B) 26% Dip In Price Shows Sentiment Is Matching Earnings

Unfortunately for some shareholders, the Envirologic AB (publ) (NGM:ENVI B) share price has dived 26% in the last thirty days, prolonging recent pain. Still, a bad month hasn't completely ruined the past year with the stock gaining 75%, which is great even in a bull market.

In spite of the heavy fall in price, given about half the companies in Sweden have price-to-earnings ratios (or "P/E's") above 23x, you may still consider Envirologic as an attractive investment with its 15.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Envirologic certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

See our latest analysis for Envirologic

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Envirologic's earnings, revenue and cash flow.

How Is Envirologic's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Envirologic's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 284%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 30% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Envirologic's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Envirologic's recently weak share price has pulled its P/E below most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Envirologic revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Envirologic you should know about.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.