Earnings Not Telling The Story For Atlas Copco AB (publ) (STO:ATCO A)

With a price-to-earnings (or "P/E") ratio of 30.6x Atlas Copco AB (publ) (STO:ATCO A) may be sending bearish signals at the moment, given that almost half of all companies in Sweden have P/E ratios under 23x 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 as high as it is.

Earnings have risen at a steady rate over the last year for Atlas Copco, which is generally not a bad outcome. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Atlas Copco

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Atlas Copco will help you shine a light on its historical performance.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Atlas Copco's to be considered reasonable.

Retrospectively, the last year delivered a decent 5.2% gain to the company's bottom line. The latest three year period has also seen an excellent 59% overall rise in EPS, aided somewhat 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.

This is in contrast to the rest of the market, which is expected to grow by 31% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Atlas Copco's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Atlas Copco's P/E?

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 Atlas Copco currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Atlas Copco with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.