Addtech AB (publ.)'s (STO:ADDT B) Shares May Have Run Too Fast Too Soon

With a price-to-earnings (or "P/E") ratio of 45.1x 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 14x 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.

With earnings growth that's superior to most other companies of late, Addtech AB (publ.) has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Addtech AB (publ.)

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How Is Addtech AB (publ.)'s Growth Trending?

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 managed to grow earnings per share by a handy 6.6% last year. This was backed up an excellent period prior to see EPS up by 105% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 10% each year during the coming three years according to the four analysts following the company. That's shaping up to be materially lower than the 22% per annum growth forecast for the broader market.

With this information, we find it concerning that Addtech AB (publ.) is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Bottom Line On Addtech AB (publ.)'s P/E

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 Addtech AB (publ.)'s analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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.

It is also worth noting that we have found 1 warning sign for Addtech AB (publ.) that you need to take into consideration.

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.