Addtech AB (publ.) (STO:ADDT B) Investors Are Less Pessimistic Than Expected

With a price-to-earnings (or "P/E") ratio of 35x Addtech AB (publ.) (STO:ADDT B) may be sending very bearish signals at the moment, given that almost half of all companies in Sweden have P/E ratios under 21x and even P/E's lower than 12x 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 so lofty.

Addtech AB (publ.) certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Addtech AB (publ.)

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

Is There Enough Growth For Addtech AB (publ.)?

In order to justify its P/E ratio, Addtech AB (publ.) would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 30% last year. The latest three year period has also seen an excellent 115% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 6.8% each year as estimated by the three analysts watching the company. With the market predicted to deliver 19% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Addtech AB (publ.)'s P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

We've established that Addtech AB (publ.) currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Addtech AB (publ.) is showing 1 warning sign in our investment analysis, you should know about.

You might be able to find a better investment than Addtech AB (publ.). 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.