There Is A Reason NCC AB (publ)'s (STO:NCC B) Price Is Undemanding

NCC AB (publ)'s (STO:NCC B) price-to-earnings (or "P/E") ratio of 12.8x might 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 24x and even P/E's above 44x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

NCC could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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 NCC

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

Does Growth Match The Low P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 22%. This means it has also seen a slide in earnings over the longer-term as EPS is down 1.6% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 10% over the next year. That's shaping up to be materially lower than the 29% growth forecast for the broader market.

With this information, we can see why NCC 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 NCC's P/E?

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.

As we suspected, our examination of NCC's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

Before you take the next step, you should know about the 4 warning signs for NCC (1 is significant!) that we have uncovered.

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.