Alligo AB (publ)'s (STO:ALLIGO B) Price Is Right But Growth Is Lacking After Shares Rocket 28%

Despite an already strong run, Alligo AB (publ) (STO:ALLIGO B) shares have been powering on, with a gain of 28% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 56% in the last year.

In spite of the firm bounce in price, Alligo's price-to-earnings (or "P/E") ratio of 16x might still make it look like a buy right now compared to the market in Sweden, where around half of the companies have P/E ratios above 23x and even P/E's above 40x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent earnings growth for Alligo has been in line with the market. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

View our latest analysis for Alligo

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Is There Any Growth For Alligo?

Alligo'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 122% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is noticeably more attractive.

With this information, we can see why Alligo is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Alligo's P/E?

The latest share price surge wasn't enough to lift Alligo's P/E close to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Alligo maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Alligo, and understanding should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.