There's No Escaping ByggPartner Gruppen AB (publ)'s (STO:BYGGP) Muted Earnings Despite A 26% Share Price Rise

The ByggPartner Gruppen AB (publ) (STO:BYGGP) share price has done very well over the last month, posting an excellent gain of 26%. The last 30 days bring the annual gain to a very sharp 32%.

Although its price has surged higher, ByggPartner Gruppen may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.3x, since almost half of all companies in Sweden have P/E ratios greater than 22x and even P/E's higher than 36x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

We've discovered 2 warning signs about ByggPartner Gruppen. View them for free.

ByggPartner Gruppen certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for ByggPartner Gruppen

Although there are no analyst estimates available for ByggPartner Gruppen, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is ByggPartner Gruppen's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like ByggPartner Gruppen's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 83% last year. Still, incredibly EPS has fallen 74% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 27% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that ByggPartner Gruppen's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From ByggPartner Gruppen's P/E?

ByggPartner Gruppen's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of ByggPartner Gruppen revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with ByggPartner Gruppen (at least 1 which is a bit concerning), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than ByggPartner Gruppen. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.