Earnings Not Telling The Story For Saab AB (publ) (STO:SAAB B)

Saab AB (publ)'s (STO:SAAB B) price-to-earnings (or "P/E") ratio of 24.7x might make it look like a sell right now compared to the market in Sweden, where around half of the companies have P/E ratios below 22x and even P/E's below 12x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Saab as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Saab

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

Is There Enough Growth For Saab?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 80% last year. The strong recent performance means it was also able to grow EPS by 141% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 12% as estimated by the four analysts watching the company. With the market predicted to deliver 23% growth , the company is positioned for a weaker earnings result.

With this information, we find it concerning that Saab is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Saab'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.

Our examination of Saab's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Saab with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Saab, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.