Earnings Working Against Permascand Top Holding AB (publ)'s (STO:PSCAND) Share Price Following 26% Dive

Permascand Top Holding AB (publ) (STO:PSCAND) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 35% share price drop.

After such a large drop in price, given close to half the companies in Sweden have price-to-earnings ratios (or "P/E's") above 20x, you may consider Permascand Top Holding as an attractive investment with its 14.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Permascand Top Holding certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you 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.

Check out our latest analysis for Permascand Top Holding

Keen to find out how analysts think Permascand Top Holding's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Permascand Top Holding's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 273%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 92% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 26% as estimated by the only analyst watching the company. That's not great when the rest of the market is expected to grow by 12%.

With this information, we are not surprised that Permascand Top Holding is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Permascand Top Holding's recently weak share price has pulled its P/E below most other companies. 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 Permascand Top Holding maintains its low P/E on the weakness of its forecast for sliding earnings, 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.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Permascand Top Holding with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Permascand Top Holding. So you may wish to see this free collection of other companies that sit on P/E's below 20x 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.