Subdued Growth No Barrier To AQ Group AB (publ) (STO:AQ) With Shares Advancing 27%

AQ Group AB (publ) (STO:AQ) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 18% is also fairly reasonable.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about AQ Group's P/E ratio of 22.9x, since the median price-to-earnings (or "P/E") ratio in Sweden is also close to 22x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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AQ Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Check out our latest analysis for AQ Group

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

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, AQ Group would need to produce growth that's similar to the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.8%. Still, the latest three year period has seen an excellent 85% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 7.1% per year during the coming three years according to the three analysts following the company. Meanwhile, the rest of the market is forecast to expand by 20% per annum, which is noticeably more attractive.

With this information, we find it interesting that AQ Group is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Key Takeaway

AQ Group appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that AQ Group currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for AQ Group that you should be aware of.

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.