There Is A Reason Instalco AB (publ)'s (STO:INSTAL) Price Is Undemanding

When close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") above 24x, you may consider Instalco AB (publ) (STO:INSTAL) as an attractive investment with its 17.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Instalco hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Instalco

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Instalco.

Is There Any Growth For Instalco?

The only time you'd be truly comfortable seeing a P/E as low as Instalco's is when the company's growth is on track to lag the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 18%. The last three years don't look nice either as the company has shrunk EPS by 11% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 7.2% as estimated by the four analysts watching the company. With the market predicted to deliver 31% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Instalco 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.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Instalco 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about this 1 warning sign we've spotted with Instalco.

Of course, you might also be able to find a better stock than Instalco. 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.