Absolent Air Care Group AB (publ) (STO:ABSO) Stock's 26% Dive Might Signal An Opportunity But It Requires Some Scrutiny

The Absolent Air Care Group AB (publ) (STO:ABSO) share price has fared very poorly over the last month, falling by a substantial 26%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 39% share price drop.

Even after such a large drop in price, Absolent Air Care Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.5x, since almost half of all companies in Sweden have P/E ratios greater than 22x and even P/E's higher than 39x 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.

We check all companies for important risks. See what we found for Absolent Air Care Group in our free report.

Recent times haven't been advantageous for Absolent Air Care Group as its earnings have been rising slower than most other companies. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.

Check out our latest analysis for Absolent Air Care Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Absolent Air Care Group.

How Is Absolent Air Care Group's Growth Trending?

Absolent Air Care Group's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a decent 2.6% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 47% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 19% per year as estimated by the dual analysts watching the company. That's shaping up to be similar to the 20% each year growth forecast for the broader market.

In light of this, it's peculiar that Absolent Air Care Group's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Final Word

Absolent Air Care Group's P/E has taken a tumble along with its share price. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Absolent Air Care Group currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Absolent Air Care Group with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Absolent Air Care Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.