Some Shareholders Feeling Restless Over Alfa Laval AB (publ)'s (STO:ALFA) P/E Ratio

When close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") below 22x, you may consider Alfa Laval AB (publ) (STO:ALFA) as a stock to potentially avoid with its 25.5x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Alfa Laval certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Alfa Laval

Keen to find out how analysts think Alfa Laval's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

Alfa Laval's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 17%. The latest three year period has also seen an excellent 57% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 11% per annum over the next three years. With the market predicted to deliver 20% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Alfa Laval 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 Alfa Laval'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 Alfa Laval'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.

Before you settle on your opinion, we've discovered 1 warning sign for Alfa Laval that you should be aware of.

You might be able to find a better investment than Alfa Laval. 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.