Getting In Cheap On Nolato AB (publ) (STO:NOLA B) Is Unlikely

Explore Nolato's Fair Values from the Community and select yours

It's not a stretch to say that Nolato AB (publ)'s (STO:NOLA B) price-to-earnings (or "P/E") ratio of 20.8x right now seems quite "middle-of-the-road" compared to the market in Sweden, where the median P/E ratio is around 23x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Recent times have been advantageous for Nolato as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Nolato

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Does Growth Match The P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 55% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 29% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 11% each year during the coming three years according to the four analysts following the company. With the market predicted to deliver 18% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Nolato is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Nolato's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Nolato 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Nolato has 1 warning sign we think you should be aware of.

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