Why We're Not Concerned About Saab AB (publ)'s (STO:SAAB B) Share Price

With a price-to-earnings (or "P/E") ratio of 31.1x Saab AB (publ) (STO:SAAB B) may be sending bearish signals at the moment, given that almost half of all companies in Sweden have P/E ratios under 22x and even P/E's lower than 14x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Saab certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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.

Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 20%. The strong recent performance means it was also able to grow EPS by 119% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 23% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 21% per annum, which is noticeably less attractive.

In light of this, it's understandable that Saab's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Saab's P/E

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.

As we suspected, our examination of Saab's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Saab that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.